access on the block : international transmission auctions - cera a lert - december 20 , 2000
title : access on the block : international transmission auctions are opening
european power markets
e - mail category : cera insight
cera knowledge area : european power
despite an apparent impasse in negotiations among european transmission
system operators , regulators , and the european commission in florence ,
auctions of international transmission capacity ( itc ) in france , the united
kingdom , denmark , belgium , italy , austria , switzerland , slovenia , and the
netherlands are opening access between countries and paving the way for the
single european marketplace .
however , the patchwork auctioning of access to itc leaves important issues
unresolved . the most significant of these include the potential for gaming ,
third - party transit , and the allocation of auction proceeds . as they stand ,
these issues , cera believes , are likely to lead to action at the european
level and the eventual imposition of a more integrated scheme .
nevertheless , current plans to open most of europe ' s itc represent a
watershed of activity that will hasten transparency in the market and
determine trade flows and signal transmission investment in 2001 .
international auctions are opening markets
a major portion of international transmission capacity on the continent will
be allocated by auction in 2001 ( see table 1 ) . in cera ' s view auctions for
itc are likely to have the greatest impact during 2001 in the following areas :
* increasing market transparency . the posting of available transmission
capacity on yearly , monthly , and daily bases will facilitate the market ' s
efficient usage of scarce interconnector capacity . for the first time ,
signals for new transmission investment , power flows , and transmission asset
valuation will come from the market .
* increasing cross - border trade . although auctions may not reduce uncertainty
in the marketplace initially , the effect of heightened transparency in access
rules and prices will soon work to increase trade . secondary markets for
interconnector capacity will add to the number of actively traded power
products and work to increase the overall level of trade . ?
* increasing price correlation . auctions will replace nonmarket - based
allocation methods such as long - term capacity reservation . the dynamic
character of shorter - term auctions , combined with an expected secondary
market for capacity , should bring access to international capacity in line
with the needs of the market . in this way the market will be able to adjust
more rapidly to changes in local conditions and thereby work to correlate
pricing points .
* increasing competition . once players have secured access to itc at a given
price , they will be looking to sign supply contracts or integrate the
capacity into structured deals . the result could be more aggressive
maneuvering on the part of incumbents and new entrants alike , resulting in
greater competition at the national level .
* reducing the competitiveness of imports . the results of international
transmission capacity auctions will determine the competitiveness of imported
power into domestic markets . final prices offered for itc will reflect the
relative cost of power between markets and work to make cheaper power more
expensive to import .
* spurring investment in transmission . the money raised through auction could
provide transmission companies with the financial capability to invest in
upgrading international transmission links . access to international
transmission capacity between the netherlands , germany , and belgium in 2001
was auctioned for 63 million euros ( see http : / / www . tso - auction . org for
details ) . ? auctions for access into spain , france , and italy are expected to
realize a premium for access to highly coveted markets .
connecting rather than integrating markets
auctions between national grids , or more accurately commercial grids , are a
pragmatic approach to the problem of granting access to scarce international
transmission capacity on an open and transparent basis . the auctions will
open access to interconnectors and at the same time reward transmission
system operators .
even so , the proposed approaches are not likely to satisfy market players or
the stated objectives of european policymakers . in cera ' s view the following
issues may eventually bring down the hammer on itc auctions :
* third - party transit . the bilateral nature of itc auctions perpetrates the
problem of tariff pancaking and discriminates against trade involving transit
through a third grid . this is ultimately inconsistent with the european
commission ' s objective of a single european power market . the fact that
physical power flows do not follow contractual flows and almost always
transit third - party grids further weakens the legitimacy of the approach .
* transaction - based scheme . although still transactional in nature ( tied to a
specific deal ) , auctions fall within the european commission ' s stated
preference for market - based mechanisms for allocating international
transmission capacity . it remains to be seen how successful this approach is
in achieving integration of national markets . action at the european level
could move allocation of itc in the direction of nontransactional mechanisms
such as market splitting , counter trading , or redispatching .
* gaming of auctions . auctions will in theory allocate access to transmission
on a nondiscriminatory market basis to those that value it most . in practice
it remains to be seen if gaming can be avoided . even though most of the
auctions have placed limits on ownership of transmission capacity , tactical
maneuvers could bid up transmission prices as players act to raise the price
of imported power .
* allocating auction proceeds . one likely outcome of auctions will be the
transfer of profits between players as transmission owners recoup some of the
rents currently reaped by other players . this will works to raise the value
of transmission assets relative to generation , suppliers , or traders . it
remains to be seen how funds from auctions will be allocated among
transmission companies and the grid , as transmission is still currently
subject to monopoly regulation .
* * end * *
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