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merchant transmission investment in europe, opportunities for private initiatives in a regulated market segment

Merchant Transmission Investment in Europe, Opportunities for Private Initiatives in a Regulated Market Segment
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De Jong, H.M.; H.P.A. Knops and R.A. Hakvoort: Merchant Transmission Investment in Europe, Opportunities for Private Initiatives in a Regulated Market Segment. In: G. Erdmann and U. Hansen (Eds), Proceedings of the 29th IAEE Annual International Energy Conference 2006: Securing Energy in Insecure Times (Potsdam, Germany, 7-10 June 2006), pp. 1-18

Hanneke de Jong
Hamilcar Knops

Although in the liberalized markets almost all transmission investments have been made on a regulated basis, the opportunities for private initiatives have drawn attention in the last few years. Joskow (2005) expects only a “very small contribution” from merchant interconnectors to the overall portfolio of transmission investment projects. The main reason for opening transmission investment to profit-motivated investors is that this may address the perceived problem of under-investment in transmission (Brunekreeft and Newbery, 2005). For example, merchant interconnectors may be an interesting option where TSOs are reluctant or not allowed to invest and/or where lasting price differences (and thus a lasting trade potential) exist.
On 27 april 2004, the European Commission gave green light to the Estlink submarine cable
project between Estonia and Finland (Eesti Energia, 2005). The Estlink is in fact the first
European merchant interconnector (exempted from regulated TPA) and connects Estonia to
This paper analyzes the process of transmission investment and identifies current economic and regulatory issues with respect to merchant investment (in Europe). First, we reflect upon the role of interconnectors in the process of market integration. After this, the transmission investment process is modeled (both for regulated and merchant investment) and decomposed into different process steps. An illustration of each individual process stage is given based on various real-life cases of transmission investment including NorNed and Estlink. The identified process steps are then analyzed further. Amongst others, the (socio) economic cost-benefit analysis is discussed. Special attention is paid to the question how to incorporate investment risk in the cost-benefit analysis of a (merchant) transmission investment. Based on the foregoing and the special European regulatory regime for merchant interconnectors, the paper concludes by identifying remaining regulatory issues.

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