European power market integration stagnates – How can policy respond?

Cross-border integration of European electricity markets provides substantial economic benefits: lower system costs, better balancing of weather-dependent fluctuations in renewable generation, and higher system resilience. Despite these advantages, cross-border grid expansion often faces resistance. A recent example is the Hansa PowerBridge project, which the Swedish government canceled in 2024 due to expected increases in domestic electricity prices. This case illustrates how distributional effects can slow down European power market integration — even when overall welfare in both countries would increase.

EWI researchers Polina Emelianova, Pia Hoffmann-Willers, and Jun.-Prof. Dr. Oliver Ruhnau examine in their new working paper “Redistribution through cross-border electricity trade: How to achieve Pareto improvement?” options to design international grid expansion in a way that makes consumers in both countries better off. Their approach combines an analytical two-country model — used to assess optimal cost and revenue sharing — with a numerical model representing the European power market. Using the Hansa PowerBridge as a case study, they quantify the impacts on consumers and overall welfare. This allows them to identify policy instruments that can enable Pareto improvement.

Asymmetric allocation of costs and rents is often not enough

The research team first uses the analytical model to determine under which conditions an asymmetric allocation of costs and revenues can lead to a Pareto improvement. Although EU regulation explicitly allows such asymmetric sharing, it is rarely applied in practice. Instead, costs and revenues are commonly split evenly (50/50) between participating countries or transmission system operators.

In a second step, the analysis quantifies the effects for the Hansa PowerBridge in a 2035 scenario. The results show that an asymmetric allocation of interconnector costs and revenues is often insufficient to offset the losses incurred by Swedish end consumers due to higher electricity prices. “The results show that the EU’s existing instrument of asymmetric cost and benefit allocation in international grid expansion is likely not enough to resolve distributional conflicts in the case of the Hansa PowerBridge,” explains Oliver Ruhnau.

State-owned producers and market design as additional solutions

Yet the analysis identifies two alternative solutions to distributional conflicts:

1. Using revenues from state-owned generators
   A Pareto improvement becomes possible when, in addition to revenues from the interconnector, additional domestic gains are redistributed. If state-owned producer — such as Vattenfall in Sweden — significantly benefit from higher export prices, their additional profits can be used to compensate households and industry losses.
2. Adjusting bidding zones
   Market design also offers a potential solution. The modelling shows that splitting the German bidding zone would substantially mitigate price increases in Sweden. In this scenario, grid expansion becomes beneficial for consumers in both countries even without transfer payments.

“Our analysis identifies several policy instruments that can turn the economically advantageous Hansa PowerBridge project into a win for consumers in both Germany and Sweden,” says Oliver Ruhnau. “This could help increase acceptance for international grid expansion and unlock the associated economic benefits.”