Chapter 5: The strategy of the European Union for the development of interconnectors: assessing the role of merchant transmission investment
Long-term Contract Regulation in EU Electricity Markets
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This last chapter of the book aims to assess the current strategy of the European Union for the development of interconnectors in the light of market players’ need for longer-term access rights to the network, especially those of dominant suppliers. There is ample evidence that in Europe the current regulatory framework has been unable to incentivize the required increase of interconnection capacity through regulated investments by incumbent TSOs, essentially due to the national tropism of regulators and the conflicts of interest of some vertically integrated companies. A recent and promising trend in this regard is the development of merchant transmission investment. Merchant transmission investments are profit-motivated investments in cross-border infrastructure undertaken by non-regulated market players. An obvious advantage in our perspective is that private parties which undertake merchant transmission investment obtain a long-term access right to the network while contributing to the overall development of interconnections. Contrary to regulated transmission investment remunerated with a regulated access tariff, merchant transmission investments are remunerated by the congestion rent arising from the spot price differential between the export and import zones, or by the sale of Financial Transmission Rights (FTR) in certain markets. Merchant transmission investments are often thought of as an acceptable second-best solution when regulated investment fails to develop at a suitable pace. They however create a well-defined regulatory trade-off. On the one hand they might indeed help address a perceived problem of under-investment.

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