Is there a missing money problem in transmission?
January 19th, 2009 by Ronnie Belmans, Catholic University of LeuvenTo achieve an efficient scheme to give incentives to invest, transmission system operators should in principle receive contributions from all users benefitting from the electricity network. Most cross-border infrastructure projects have a common European interest as they contribute to the EU strategic energy policy objectives, while they are still mainly financed by the countries that they interconnect.
Via the Trans European Energy Network programme (TEN-E, hereafer) the European community has started financing feasibility studies of some projects and in a few cases also a very small part of the investment cost.
Next to the TEN-E projects, an Inter-TSO Compensation scheme (ITC, hereafter) has been created so that countries receive compensation if their assets are used by transmission system operators that do not contribute to its financing. This scheme has been the subject of a lot of debate and we argue that it is not adequate and is not the right tool to address the missing money problem for transmission investments in Europe.
Therefore, looking at today’s (lack of) progress in and the need for major transmission projects and at the different available revenue mechanisms, it is our idea that European TSO’s suffer from a missing money problem for adequately financing the necessary transmission investments.
To solve that missing money problem for transmission investments, we see two possible steps.
Step 1: A better allocation of congestion revenues among TSOs
Congestion revenues are found at those interconnections where the capacity made available to the market is lower than required by the market.
Today, congestion revenues are split among the two countries at both sides of a congested border. The congestion can however be due to insufficient capacity elsewhere in the grid, at another border or even deeper in the grid of a third country. A fifty-fifty split of congestion revenues is therefore not in line with efficient grid development.
A regional view would better accommodate the investment problem, not only at a planning stage but also at a congestion revenue distribution level. In our view, the lack of an arrangement among TSOs on how to redistribute congestion revenues among them is also obstructing initiatives towards superior ways of making transmission capacity available, like flow based approaches.
Step 2: A patch for the missing money
Because congestion revenues are known to fall short to recover all transmission costs, an additional mechanism is needed. This additional mechanism, in our view, will however have to be very different from the current ITC scheme to be effective in remedying the missing money problem in transmission.
The time-scale of such a mechanism should be in line with the nature of the costs. For instance, infrastructure investments usually result in large sunk costs. In order to do the investment, an agreement among involved TSOs should lead to cost recovery. This should be dealt with on an ex ante basis. TSOs’ decisions and regulators’ approvals are based on complete upfront cost-benefit analyses, while the current ITC scheme is ex-post and yearly adjusted to compensate for the infrastructure that happens to be there. Agreement on the cost distribution should be reached at the moment of the investment decision, for instance in the course of setting up regional development plans.
Additionally, the focus should lie on future investments only, as the investment decisions leading to the existing infrastructure were taken without relying on a revenue stream funded by external users.
We therefore welcome the third package that introduces the regional development plans and also note that the 2nd Strategic Energy Review that came out recently proposes to boost regional priority projects and proposes to reform the TEN-E guidelines.
Ronnie Belmans, Patrik Buijs, Leonardo Meeus, David Bekaert
Katholieke Universiteit Leuven – ESAT/Electa