Regulatory risks for merchant interconnectors in the European electricity network
Co-author: Adrien de Hauteclocque
Europe is concerned by under-investment in crossborder electric transmission lines because it limits cross-border exchanges which remain an important source of competition within the European market. The current organization of the European power transmission network based on regulated national monopolies (with tariff regulation and Third Party Access – TPA) seems unable to solve the issue. Exempting some investments in cross-border interconnection lines from tariff regulation and TPA is thought to go some way to addressing this problem. These exempted investments in cross-border power lines are called Merchant Transmission Investments (MTIs – MTI is also used for Merchant Transmission Investor).
The development of the MTIs Estlink (connecting Estonia and Finland) or Britned (connecting Great Britain and the Netherlands) in the last few years has demonstrated that a new interest for MTIs is growing in the marketplace. Besides, national regulators and the European Commission seem to be favorable to this instrument to push forward network development.
Transmission investments, whether regulated or exempted, are capital-intensive and have a long lifespan. That is why investors require stable and clear market and regulatory frameworks. Market risk for MTI has already been analysed in the economic literature, but regulatory risk has received little attention. The present article focuses on the regulatory risk faced by potential European investors in MTIs. It shows that this risk is especially embedded in the methodology set in the Regulation 1228/2003 and the Regulation 714/2009 advocated to examine MTIs.