INVESTMENT IN ELECTRICITY TRANSMISSION INFRASTRUCTURE: THE ROLE OF MERCHANT LINES

The progressive opening of electricity markets in Europe will also be attained through increased levels of trading of power between Member States. This means that actual networks must be upgraded, especially with reference to cross-border links. The latest trend seems to be an attempt by Regulators to stimulate the development of transport capacity by allowing third parties to invest in the network: the so-called “merchant (or market-based) transmission investment”. The European Regulation 1228/2004 on cross border exchanges in electricity opens the door to unregulated merchant transmission investment in the EU, although with some restrictions. Economic theory provides strong arguments in favor of merchant investment. It has been shown that, under some strict assumptions, efficient transmission investments that create transmission rights satisfying certain simultaneous feasibility constraints will be profitable; therefore, inefficient transmission investments will not be undertaken. In reality, though, imperfections in the competitive wholesale electricity markets lead nodal spot electricity prices to depart from their efficient levels, thereby distorting investment incentives. More generally, efficient investment in networks will only occur when appropriate network pricing exists. This precondition is at the moment totally absent in the European electricity markets. Is it then possible for market-based transmission investment to produce its virtuous effects when a system of locational marginal pricing is not in place that provides the right signals to investors? The absence of a market exasperates the distortions created by market imperfections. In sum, merchant investment is not a panacea, and its role in transmission networks expansion cannot be exclusive, as the few existing experiences have demonstrated. The role of regulators remains critical in this segment of the electricity industry, where an authentic decentralization is not yet feasible