Electricity markets are increasingly integrated over multi-zones systems, while transmission and renewable energy policies typically remain local and without sufficient cross-border coordination. This is the status quo in both the US and the EU, and the starting point of our analysis in this paper. We investigate how cooperative behavior can improve welfare, using a three step model with: i) transmission investment, ii) generation investment and iii) electricity market that we apply to an interconnected two zone system. The two zones have the same consumption profile, have equal access to electricity generation technologies with the same costs, but we introduce differences in the availability of renewable energy.
We find that there are strong and complex interactions between renewable energy and transmission policies. Indeed, if there is no cooperation in renewable energy development, it does not necessarily pay to cooperate in transmission development. We also find that cooperation in renewable energy development does pay-off in most cases, but a significant part of the potential welfare increase is lost if there is no cooperation in transmission development.