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Content-Type: text/plain; charset=ANSI_X3.4-1968 Content-Transfer-Encoding: 7bit X-From: "Webmaster@cera.com" <webmaster@CERA.com< X-To: X-cc: X-bcc: X-Folder: \Vincent_Kaminski_Jun2001_1\Notes Folders\All documents X-Origin: Kaminski-V X-FileName: vkamins.nsf 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** ********************************************************* Come Shoot the Rapids with us at CERAWeek2001, "Shooting the Rapids: Strategies and Risks for the Energy Future" in Houston, February 12-16, 2001!? For more information and to register, please visit http://www20.cera.com/ceraweek/ ********************************************************* ********************************************************************** To make changes to your cera.com account go to: http://www20.cera.com/client/updateaccount Forgot your username and password? Go to: http://www20.cera.com/client/forgot This electronic message and attachments, if any, contain information from Cambridge Energy Research Associates, Inc. (CERA) which is confidential and may be privileged. Unauthorized disclosure, copying, distribution or use of the contents of this message or any attachments, in whole or in part, is strictly prohibited. Terms of Use: http://www20.cera.com/tos Questions/Comments: webmaster@cera.com Copyright 2000. Cambridge Energy Research Associates
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