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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