Investing in Power Grid Infrastructure as a Flexibility Option: A DSGE Assessment for Germany

Abstract

This paper provides an approach to incorporate planned investments in power grid infrastructure in Germany, which intend to provide the necessary flexibility to integrate large shares of variable renewable energy sources into the power system, into a dynamic stochastic equilibrium model. Since the investments’ economic impact remains unclear, this paper sheds light on two questions: Do power grid infrastructure investments in Germany have the potential to positively impact economic performance, particularly GDP and employment? Is power grid infrastructure investment an efficient way to provide flexibility to the electricity system? We find the potential for negative effects of power grid infrastructure investments on economic outcomes, which can, however, be mitigated by an adequate design of the investments and its framework conditions.

Keywords: DSGE Analysis, Infrastructure, Germany, Electric Grid, Energy Transition, Flexibility

JEL Classification: C68, E61, O13, P18, Q43, Q48, Q56