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Project information

Inter-TSO compensation mechanism for cross-border trading in the EU Internal Electricity Market

I.J. Pérez-Arriaga L. Olmos

May 2005 - October 2005

Funding entity Florence School of Regulation

The objective of this study is to recommend the most suitable method to compute the economic compensations (inter-TSO payments, or payments among Transmission System Operators) that are due to EU Member States because of the use of their networks by external agents participating in the EU Internal Electricity Market. The study reviews and compares the different approaches that have been proposed in the recent debate for assigning network costs to different agents (generators/load/TSOs). All the approaches assume that the extent of utilisation of (elements of) a TSO’s grid by the different agents is a suitable measure for assigning responsibility for network costs. The different approaches, however, are characterised by the different ways in which they determine the degree of utilisation of the various elements of the network by different agents, as well as the nature of the flows for which compensation is provided. On the basis of the assessment of the different approaches with respect to the specific criteria outlined above, the study identifies the most appropriate one to be included in the longer term compensation mechanism.
The different approaches are, on the other hand, much less specific on the coverage of the costs to be assigned to the different agents and on the way in which these costs are evaluated. In fact, all of the approaches can be applied to the forward-looking, long-run average incremental costs (LRAIC) of new and existing infrastructure. The study discusses methodological approaches to LRAIC and proposes a solution which responds to the specific criteria outlined above.