Merchant interconnector projects by generators in the EU: Effects on profitability and allocation of capacity

Silvester Van Koten

No 2011/10, RSCAS Working Papers from European University Institute

Abstract: When building a cross-border transmission line (a so-called interconnector) as a for-profit (merchant) project, where the regulator has required that capacity allocation be done non-discriminatorily by explicit auction, the identity of the investor can affect the profitability of the interconnector project and, once operational, the resulting allocation of its capacity. Specifically, when the investor is a generator (hereafter the integrated generator) who also can use the interconnector to export its electricity to a distant location, then, once operational, the integrated generator will bid more aggressively in the allocation auctions to increase the auction revenue and thus its profits. As a result, the integrated generator is more likely to win the auction and the capacity is sold for a higher price. This lowers the allocative efficiency of the auction, but it increases the expected ex-ante profitability of the merchant interconnector project. Unaffiliated, independent generators, however, are less likely to win the auction and, in any case, pay a higher price, which dramatically lowers their revenues from exporting electricity over this interconnector.

Keywords: electricity markets; regulation; cross-border electricity transmissions; vertical integration; asymmetric auctions; bidding behavior (search for similar items in EconPapers)
Date: 2011-02-25
New Economics Papers: this item is included in nep-ene, nep-ppm and nep-reg
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Citations: View citations in EconPapers (1)

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Journal Article: Merchant interconnector projects by generators in the EU: Profitability and allocation of capacity (2012)
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