Power Connections


expansion plan. These incentives depend, at least in part, on other activities performed by the SO. In a liberalised electricity sector, the SO is not allowed to trade energy, but in many cases is allowed to own and operate transmission assets (i.e. to be a transmission asset owner – TO), the so-called Transmission System Operator (TSO) model, where the SO also owns and operates all, or a large part of the transmission network. This model includes separate transmission companies (TransCos). A number of regulators have attempted to define an incentive mechanism that would promote efficient planning by the TSO. An example of such a mechanism can be found in the scheme introduced by the Italian Regulator for the period 2008-2011, which differentiates the ROI for the TSO, based on a recognised additional WACC for particularly strategic investments on the grid. An alternative model for transmission expansion is based


on merchant initiatives. In this case, individual investors propose specific developments that are then subject to approval by the competent authorities. The merchant investment in infrastructure is not remunerated through the tariff system, but through the benefits from the commercial use of the infrastructure. In practice, very few cross-border transmission lines have been so far developed on a completely merchant basis around the world. Presently most of the international markets are based on a


close cooperation among the entities responsible for system operation at national level (Central Dispatch Centre, ISO or TSO). For instance, the design of the EU internal market is based on a close coordination between the national TSOs that have agreed on all the relevant issues for cross-border trading. In countries without electricity markets, the national dispatch


worldPower 2010


centres typically fulfil this coordination role. In developing economies several cross-border transmission


projects were developed in the last few years. Where the projects have political support, other barriers have been overcome. In these cases the environmental opposition is less intense (perhaps because of the need for cheap electricity) and the local organisations are prone to accept compensation.


Security of Supply & Climate Change Security of supply has an underlying economic value, which


could be estimated by consumers willingness to pay for it. Policies to mitigate climate change are introducing additional requirements to the process of planning and developing internal and cross-border interconnections. Electricity prices in markets with a high concentration of ownership do not necessarily reflect variable costs, since dominant generators can exercise market power forcing prices above socially optimal levels. In liberalised electricity markets it may be more beneficial


to invest more in cross-border expansion than in a centrally planned system. In this case the additional cross-border capacity may encourage generators to bid their actual variable costs and thus create a more competitive market. The larger the cross-border capacity, the less likely it is that large generators can exercise market power. Thus, increased cross-border capacity can contribute to


reduction of prices through a reduction of market power. In any case, the increase of the cross-border capacity helps improve the efficiency of the electricity system since the merit-order dispatching system can achieve a better allocation with the increase of the generating power capacity that supplies the electricity system.


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