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Regulatory Uncertainty and Inefficiency for the Development of Merchant Lines in Europe

  • Adrien De Hauteclocque

    (ADIS - Analyse des Dynamiques Industrielles et Sociales - UP11 - Université Paris-Sud - Paris 11 - Département d'Economie)

  • Vincent Rious

    (SUPELEC-Campus Gif - SUPELEC)

Registered author(s):

    This paper evaluates regulatory uncertainty and inefficiency that may prevent merchant transmission investors from committing in Europe, in particular when they are dominant generators. We argue that market players may perceive regulatory uncertainty to acquire exemption on merchant line mainly because of the discretion given for the application of Art. 7 of the Regulation 1228/2003 on cross-border exchanges. However we show that an emerging strategy of the European Commission for granting exemption on merchant transmission line can be eventually derived from recent legal and regulatory proceedings. It mainly consists in relying on TSOs to build merchant lines. We demonstrate that this strategy is neither a first best nor a second best given imperfect unbundling and the current flows in the allocation of regulatory powers. Indeed, it prevents merchant line investment by dominant generators with low generation cost while they have currently more incentive than TSOs to build merchant lines. Since unregulated merchant transmission investment by generators would be problematic, we show eventually that the current strategy of the application of Regulation can easily be fine-tuned to reach this second-best optimum.

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    Date of creation: 10 Oct 2008
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    Publication status: Published in 7th Conference on Applied Infrastructure Research, Oct 2008, Berlin, Germany. 12 p., 2008
    Handle: RePEc:hal:journl:hal-00338296
    Note: View the original document on HAL open archive server: https://hal-supelec.archives-ouvertes.fr/hal-00338296
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    1. Paul L Joskow, 2005. "Incentive Regulation In Theory And Practice - Electricity Distribution And Transmission Networks," Working Papers 0514, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
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