Business models for new interconnections: allocation of costs, benefits and risks

SUMMARY Increasing number of cross-border electrical interconnections (interconnectors, cross border links, tie lines) and the growing diversification of relevant commercial arrangements call for deeper considerations on the evaluation principles and allocation criteria of costs, benefits and related risks on both sides of the line. In particular, there seem to be no specific rule nor consolidated practice, when the complexity of the implementation scheme overcomes the “traditional” TSO-public-asset-based-approach envisaging a territorial splitting of investment costs and fifty-fifty splitting of benefits. The “merchant lines” discipline is applicable for fully private investments, but is by far not exhaustive, especially when mixed approach for private-public-partnership or multilateral / multi-party links are considered. Intrinsic flexibility of the merchant line mechanisms and the possibility of asymmetric cost/benefit sharing between investors in the interconnection gives raise to innovative and case-tailored implementation schemes. Indeed some real projects under feasibility or realisation phase already present interesting and diversified examples of “business models”. Triggered by a real case recently studied by the authors (a mix-split approach of a line with public nature in one country and private nature in the other country), the economics of which are here reported, and direct experience in several other on-going projects, this paper intends to address in a structured way the issues of: - Economic drivers for costs and benefits for public and merchant lines - Options for implementation schemes - Business models for public investment, in terms of allocation of costs, benefits and risks, exploring asymmetric and unilateral investment schemes - Business models for merchant lines, considering the conditions imposed on Third-party Access (TPA) exemption granting, exploring the variety and flexibility of sharing cost/benefit/risks between involved countries and involved investors - the change of perspective necessary when a private investor is among the developers, and in particular when a mixed private-public approach to the investment is sought for.