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Regulatory risk for European merchant transmission investors

November 2010

Network Industries Quarterly

Article written with Adrien de Hauteclocque, Florence School of Regulation.

Merchant Transmission Investments (MTI) are profit motivated investment in cross-border infrastructure undertaken by non-regulated market players. Contrary to regulated investments remunerated with a regulated access tariff, MTI are remunerated by the congestion rent arising from the spot price differential between the export and import zones.

The granting of authorizations to the Estlink, Britned and East West Cables in the last few years has demonstrated that a new interest for MTI in electricity is growing in the marketplace and that national regulators, as well as the European Commission, seem to be favourable to this new way to push forward the development of the network. The regulation of MTI, however, remains a major challenge for EU energy regulation. In particular, providing a clear, stable and transparent regulatory framework limiting regulatory risk for potential investors has been an increasing concern for the European Commission and national regulators. After a first interpretative note in 2004, DG Energy published a second document on MTI in 2009 to clarify its enforcement policy. The French regulator CRE and the UK National Grid also launched consultations on the same subject in May and July 2010 (CRE, 2010; NG, 2010).

This short note aims to analyze the mechanics of regulatory risk for potential European investor in MTI. It first succinctly present the MTI regulatory regime under the first and second liberalization packages and then analyzes the two main sources of regulatory risk in the EU: the methodology used by regulators to examine applications for exemption and the current allocation of regulatory powers.    

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