Integration of electricity markets : an analysis of TSO-owned and non-TSO-owned cross-border interconnectors

2018

The European electricity market is gradually becoming more integrated due to increased crossborder

transmission capacity. Integrated electricity markets are expected to improve social

welfare through security of supply and e cient electricity generation. Thus, inadequate crossborder

transmission capacity causes an ine cient allocation of resources at a regional level.

The integration of electricity markets will impact electricity prices and the social welfare in the

connected regions. A cross-border interconnector between the bidding zone NO5 in Norway

and the market area Great Britain will exploit the di erent price levels and structures of the

regions. The interconnector is expected to increase electricity prices in NO5 and decrease

electricity prices in Great Britain. Further, the social welfare is expected to increase in both

NO5 and Great Britain.

This thesis estimates the annual congestion rent of a 1 400MWinterconnector between NO5 and

Great Britain. The Norwegian share of the congestion rent is estimated to vary between e51,4

million and e168,4 million in the period from 2026 to 2045. To account for the uncertainty in the

future price di erential between the two power markets, the range of the estimated congestion

rent is constructed from the positively skewed distribution of the historical price di erential

from 2011 to 2017. This thesis nds that the range of the estimated congestion rent is expected

to di er greatly from the baseline. Moreover, alteration in the electricity mix of power markets

and additional cross-border interconnectors are identi ed as sources of uncertainty for the future

price di erential, which in turn will impact the congestion rent.

This thesis argues that a non-TSO investor will under-provide cross-border transmission capacity

relative to what is socially desirable on a national level. Moreover, the capacity decision of

a non-TSO investor is a ected by the income regulation of the interconnector. If national regulatory

authorities wish to encourage non-TSO investments in transmission capacity, the income

regulation of interconnectors must be in the favour of the interconnector owners. Further, the

income regulation must account for the uncertainties in the future price di erential. This thesis

identi es a su ciently high revenue cap, an extended settlement period, an incorporation of a

revenue

oor and a higher allowed share of revenues derived from capacity markets as possible

solutions to incentivise non-TSO investments in interconnectors through income regulation.