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investment in cross border transmission capacity: economics or politics? an european case study

Investment in cross border transmission capacity: Economics or Politics? An European Case Study
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De Jong, H.M.; J.C.van der Lippe and H.P.A. Knops: Investment in cross border transmission capacity: Economics or Politics? An European Case Study, pp. 1-21. In: The Proceedings of the 30th Conference of the International Association for Energy Economics: From Restructuring to Sustainability: Energy Policies for the 21st Century, 18-23 February 2007. At: Wellington, New Zealand. Cleveland OH: IAEE, 2007 Eds.: Geoff Bertram. ISBN: ISSN 1559-792X. International proceeding (refereed)

Hanneke de Jong
Hamilcar Knops

The European Commission concludes both in its preliminary sector enquiry report (DG COM, 2006) and in its report on progress in creating the internal gas and electricity market (DG TREN, 2005) that market integration in the European electricity sector is, among others, hampered by insufficient interconnector capacity and a lack of adequate incentives for investment in additional capacity (DG COM, 2006). This call for additional investment de facto echoes the appeal that DG for Energy and Transport has made since the Barcelona European Council of March 2002, where an agreement was made about a specific target for the volume of cross border capacity and a list of priority investment projects in the framework of the trans-European network (European Council, 2002). The identified priority projects (formalised in a decision of the European Council and Parliament) have priority for Community financial aid. The total amount of Community aid may reach 20% of the total investment cost in specific cases, including priority projects in energy networks. In order to further address the perceived1 problem of underinvestment, the European Union opened transmission investment to profit motivated (merchant) investors (Brunekreeft and Newbery, 2005) by means of the 2003 Regulation ((EC) No. 1228/2003) on conditions for access to the network for cross border exchanges (Regulation, 2003).
Based on the developments listed above, one may conclude that Member States experience substantial political pressure from the European level to grant permission to applications for new cross border transmission investment. In addition, specific national conditions and policy goals play an important role − possibly even a dominant one − with respect to Member States’ willingness to grant permission for either a regulated or merchant (private) investment project.
This paper analyses the decision processes of three recent European cross border transmission projects, namely the Estlink, NorNed and BritNed cables. First, we shortly discuss the basics of regulated and merchant transmission investment where section 3 specifically focuses on the special regulatory regime for merchant transmission investment. After this, section 4 discusses the economics of cross border transmission investment. A short description of the three cases examined is given in section 5 followed by a detailed analysis of the corresponding regulatory decision process in section 6. Based on the foregoing, we identify points of attention and lessons learned concerning cross border transmission investment in Europe. This paper concludes by formulating recommendations addressed to both EU politicians and Member States’ regulatory authorities deciding on (cross border) transmission investment.

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