Merchant Interconnectors in the European Electricity System

Abstract

This paper considers the potential for merchant investment in interconnection in the European electricity system. As transmission is in Europe in principle a regulated business, it is analysed here under what conditions merchant interconnectors could be allowed. First, the general role of interconnectors in the process of the integration of the European electricity market is considered. Second, it is discussed why merchant interconnectors could be a valuable complement to regulated interconnectors. Third, the general European regulatory framework for transmission is given. Fourth, the economics of merchant interconnectors are considered and the consequences for the regime merchant investors wish to obtain. Fifth, an extensive overview is given of the special legal regime that can be granted to merchant interconnectors in Europe. Sixth, the decisions concerning the Estlink merchant interconnector are analysed. This interconnector between Estonia and Finland is the only example in which a special regime for a merchant interconnector for electricity has been granted to date. Seventh, the special regime for merchant interconnectors is analysed. Finally, it is concluded what the potential is for merchant interconnectors in the European electricity industry.

New Perspectives on Investment in Infrastructures

“…In these circumstances, it may be an option to consider an investment in interconnection capacity which can be recovered via the exploitation of the trade potential across that link (rather than through regulated cost-based transport tariffs). This is called 'merchant' transmission investment (see, e.g., Knops and De Jong 2005). …”

Is There Still a Case for Merchant Interconnectors? Insights from an Analysis of Welfare and Distributional Aspects of Options for Network Expansion in the Baltic Sea Region

“…In a similar line of reasoning, Kuijlaars and Zwart (2003) and Knops and De Jong (2005) underline the problems of underinvestment (as compared to the welfare optimal solution). As a remedy to the under-investment problem, Brunekreeft (2005) suggests (regulatory) "capacity checks."…”