Table of Contents
1 INTRODUCTION…………………………………………………………………………………… 1
1.1 REASON FOR THIS STUDY……………………………………………………………… 1
1.2 THE EUROPEAN ELECTRICITY SECTOR AS SUBJECT OF STUDY …………………. 2
1.3 SOCIAL AND SCIENTIFIC RELEVANCE ……………………………………………….. 3
1.4 READING GUIDE …………………………………………………………………………. 6
2 REGULATORY CHANGE ………………………………………………………………………….. 7
2.1 INTRODUCTION………………………………………………………………………….. 7
2.2 REASONS FOR REGULATION…………………………………………………………… 7
2.3 THEORIES EXPLAINING REGULATION ……………………………………………….. 9
2.4 REGULATORY CHANGE………………………………………………………………… 12
2.4.1 Causes of regulatory change …………………………………………………. 13
2.4.2 Process of regulatory change ………………………………………………… 13
2.4.3 Outcome of regulatory change ………………………………………………. 15
2.4.4 Conceptual model of regulatory change……………………………………. 16
2.5 CONCLUSIONS …………………………………………………………………………. 17
3 RESEARCH FRAMEWORK……………………………………………………………………… 19
3.1 INTRODUCTION………………………………………………………………………… 19
3.2 PROBLEM DEFINITION AND RESEARCH GOAL…………………………………….. 19
3.3 PROBLEM OWNER AND RESEARCH SCOPE ………………………………………… 21
3.3.1 Central problem owner………………………………………………………… 21
3.3.2 Basic elements of scope ………………………………………………………. 21
3.3.3 Other elements of scope………………………………………………………. 22
3.4 THEORETICAL FRAMEWORK: DECISION MODELLING IN POLICYMAKING……. 24
3.4.1 Introduction……………………………………………………………………… 24
3.4.2 Conceptual model of policy decision-making ……………………………… 25
3.4.3 Conceptual model as applied to research goal ……………………………. 32
3.5 RESEARCH QUESTIONS ………………………………………………………………. 37
3.6 RESEARCH METHOD AND STRUCTURE …………………………………………….. 38
4 THE EUROPEAN ELECTRICITY SYSTEM…………………………………………………… 41
4.1 INTRODUCTION………………………………………………………………………… 41
4.2 TECHNICAL INTERNATIONAL SUBSYSTEM………………………………………… 42
4.3 ECONOMIC INTERNATIONAL SUBSYSTEM…………………………………………. 43
4.4 TECHNICAL AND ECONOMIC SUBSYSTEM: INTERRELATIONS…………………. 46
4.5 THE MULTI-LEVEL LEGAL SUBSYSTEM……………………………………………… 47
4.5.1 Hierarchical composition of the European legal framework…………….. 47
4.5.2 Current structure EU legislation……………………………………………… 48
5 THE EUROPEAN ELECTRICITY MARKET ACTOR NETWORK…………………………. 51
5.1 INTRODUCTION………………………………………………………………………… 51
5.2 THE EUROPEAN UNION ……………………………………………………………….. 51
5.3 REPRESENTATIVE ORGANIZATIONS OF MARKET PARTIES …………………….. 53
5.4 REPRESENTATIVE ORGANIZATIONS OF TSOS ……………………………………. 56
5.5 NATIONAL GOVERNMENTS…………………………………………………………… 59
5.6 NATIONAL REGULATORY AUTHORITIES……………………………………………. 61
5.7 OVERVIEW MAIN ACTORS EUROPEAN ELECTRICITY MARKET………………….. 63
6 EUROPEAN MODES OF REGULATION……………………………………………………… 65
6.1 INTRODUCTION………………………………………………………………………… 65
6.2 EUROPEAN MODES OF REGULATION: A DEFINITION ……………………………. 66
6.3 TRADITIONAL MODES OF REGULATION……………………………………………. 66
6.3.1 (A) Default mode: Mutual Adjustment ……………………………………… 67
6.3.2 (B) Intergovernmental Negotiations ………………………………………… 67
6.3.3 (C) Hierarchical Direction……………………………………………………… 68
6.3.4 (D) Joint Decision ………………………………………………………………. 68
6.3.5 Overview of traditional European modes of regulation ………………….. 69
6.4 NEW MODES OF REGULATION……………………………………………………….. 70
6.4.1 The need for new modes of regulation……………………………………… 70
6.4.2 (E) Comitology………………………………………………………………….. 71
6.4.3 (F) New Instruments…………………………………………………………… 73
6.4.4 (G) Self-regulation……………………………………………………………… 73
6.4.5 (H) Partnership …………………………………………………………………. 74
6.4.6 (I) Open Method of Coordination ……………………………………………. 75
6.4.7 (J) Regulatory Agency…………………………………………………………. 76
6.4.8 Overview new European modes of regulation …………………………….. 78
6.5 CRITERIA OF GOOD GOVERNANCE…………………………………………………. 78
6.6 CONCLUSIONS …………………………………………………………………………. 80
7 PROMINENT MODES AND THE CRITERIA OF GOOD GOVERNANCE………………. 81
7.1 INTRODUCTION………………………………………………………………………… 81
7.2 REGULATORY DEVELOPMENTS IN THE MARKET INTEGRATION PROCESS ….. 81
7.3 REGULATORY DEVELOPMENTS: THE EU VERSUS THE US ……………………… 94
7.4 EUROPEAN MARKET INTEGRATION: PROMINENT MODES OF REGULATION… 96
7.4.1 Traditional modes and the electricity market integration process …….. 97
7.4.2 New modes and the electricity market integration process …………….. 98
7.4.3 Prominent modes in the process of electricity market integration…….102
7.5 PROMINENT MODES OF REGULATION: MAIN DIFFERENCES ………………….105
7.5.1 Level of obligation versus level of discretion………………………………105
7.5.2 Level of focus on process versus level of focus on contents……………106
7.5.3 Level of solution flexibility versus level of democratic legitimacy……..108
7.5.4 Institutional level of regulation versus origin of regulation …………….109
7.6 PROMINENT MODES OF REGULATION: NORMATIVE SCORES…………………111
7.7 CONCLUSIONS …………………………………………………………………………119
8 INTRODUCTION TO THE CASE STUDY ………………………………………………….. 121
8.1 INTRODUCTION………………………………………………………………………..121
8.2 WHY USING A CASE STUDY?…………………………………………………………122
8.3 TYPE OF CASE STUDY …………………………………………………………………123
8.4 GENERAL CASE STUDY DESIGN …………………………………………………….123
8.5 CASE STUDY DESIGN APPLIED TO RESEARCH ……………………………………125
9 CASE 1: INTERCONNECTOR INVESTMENT …………………………………………….. 129
9.1 INTRODUCTION………………………………………………………………………..129
9.2 INTERCONNECTORS…………………………………………………………………..130
9.3 REGULATORY DEVELOPMENTS SO FAR…………………………………………….131
9.4 REGULATORY REGIME ………………………………………………………………..134
9.4.1 Regulated versus merchant investment ……………………………………134
9.4.2 Merchant investment: current and proposed regulatory regime ………136
9.5 ECONOMIC RATIONALE……………………………………………………………….138
9.6 FOUR RECENT CASES…………………………………………………………………141
9.6.1 NorNed …………………………………………………………………………..141
9.6.2 Estlink…………………………………………………………………………….142
9.6.3 BritNed …………………………………………………………………………..143
9.6.4 East-West………………………………………………………………………..145
9.7 REGULATORY ISSUES…………………………………………………………………146
9.7.1 Issues concerning regulated interconnectors ……………………………..146
9.7.2 Issues concerning merchant interconnectors……………………………..147
9.8 CONCLUSIONS …………………………………………………………………………150
10 CASE 2: CONGESTION MANAGEMENT…………………………………………………. 155
10.1 INTRODUCTION………………………………………………………………………..155
10.2 CROSS-BORDER CONGESTION MANAGEMENT …………………………………..156
10.2.1 Basic definitions ………………………………………………………………..156
10.2.2 Congestion management practices………………………………………….156
10.2.3 Market based mechanisms……………………………………………………157
10.3 REGULATORY DEVELOPMENTS SO FAR…………………………………………….161
10.4 FLOW-BASED MARKET COUPLING IN THE CENTRAL-WEST REGION………….166
10.5 STRUCTURE OF THE TECHNICAL-ECONOMIC MODEL……………………………168
10.6 APPLICATION OF THE TECHNICAL-ECONOMIC MODEL………………………….172
10.6.1 Effects on a national level …………………………………………………….172
10.6.2 Effects on a regional level…………………………………………………….174
10.6.3 Effects of additional interconnector capacity………………………………176
10.6.4 Results and discussion ………………………………………………………..177
10.7 CONCLUSIONS …………………………………………………………………………180
11 CASE 3: MARKET TRANSPARENCY……………………………………………………… 185
11.1 INTRODUCTION………………………………………………………………………..185
11.2 TRANSPARENCY IN ELECTRICITY WHOLESALE MARKETS………………………186
11.3 REGULATORY DEVELOPMENTS SO FAR…………………………………………….189
11.4 MARKET TRANSPARENCY: ADVANTAGES AND RISKS …………………………..192
11.5 MARKET TRANSPARENCY VARIABLES………………………………………………194
11.6 CONCLUSIONS …………………………………………………………………………196
12 A STRUCTURED APPROACH TO REGULATORY MODE DECISION-MAKING …. 199
12.1 INTRODUCTION………………………………………………………………………..199
12.2 REGULATORY TRENDS OF THE LAST DECADE…………………………………….199
12.3 FROM ISSUE-SPECIFIC POLICY CONTEXT TO WEIGHT FACTORS……………..205
12.4 FINAL PREFERENCE DETERMINATION ……………………………………………..209
12.5 STARMODE APPROACH: REVIEW AND TESTING………………………………….211
12.5.1 Verification ………………………………………………………………………211
12.5.2 Validation ………………………………………………………………………..220
13 CONCLUSIONS AND REFLECTION……………………………………………………….. 229
13.1 INTRODUCTION………………………………………………………………………..229
13.2 A STRUCTURED APPROACH TO REGULATORY MODE DECISION-MAKING……229
13.2.1 Answers to the research questions………………………………………….229
13.2.2 Reflection on the STARMODE approach…………………………………….234
13.2.3 Recommendations to the European Commission…………………………236
13.2.4 Further research………………………………………………………………..237
13.3 CASE STUDY CONCLUSIONS…………………………………………………………237
13.3.1 Interconnector investment……………………………………………………238
13.3.2 Congestion Management ……………………………………………………..239
13.3.3 Market transparency …………………………………………………………..240
13.4 REFLECTION ON THE EUROPEAN INTEGRATION OF ELECTRICITY MARKETS .241
ANNEXES
ANNEX 1: WILLIAMSON’S FOUR-LAYER MODEL OF INSTITUTIONS …………………………………..245
ANNEX 2: PAIRED ASSESSMENT CRITERIA…………………………………………………………..247
ANNEX 3: EXAMPLE DESCRIPTIVE ALTERNATIVE ASSESSMENT ………………………………………249
ANNEX 4: CO-DECISION PROCEDURE ……………………………………………………………….252
ANNEX 5: PROCEDURAL ASPECTS COMITOLOGY PROCEDURES ………………………………………253
ANNEX 6: INTERCONNECTOR ECONOMICS …………………………………………………………..256
ANNEX 7: ISSUE-SPECIFIC CHARACTERISTICS/REGULATORY NEEDS AND EVALUATION CRITERIA…..262
ANNEX 8: COMPUTATION OF THE EVALUATION CRITERIA’S WEIGHTS ……………………………….266
ANNEX 9: INPUT FOR DOMINANCE AND INFERIORITY MATRIX……………………………………….267
ANNEX 10: APPLICATION STARMODE TO CASE STUDY ……………………………………………269
REFERENCES……………………………………………………………………………………….. 293
SUMMARY…………………………………………………………………………………………… 305
SAMENVATTING…………………………………………………………………………………… 311
CURRICULUM VITAE …………………………………………………………………………….. 317
Abstract
This study focuses on the processes through which the rules and regulations that govern European electricity markets – and inherently, their integration process – are established. So far, European policy makers have largely followed a ’trial-and-error’ approach to finding an appropriate regulatory mode (process) for dealing effectively with market integration issues. This unstructured approach to regulatory mode selection leads to several problems: – Today’s trial-and-error strategy of shifting from one regulatory mode to another is time-consuming. – In the regulatory mode selection process, certain key principles of good governance are insufficiently considered. – European regulatory processes are experienced as vague, intransparent, and illegitimate by ‘outside’ stakeholders. This study develops a ‘structured approach to regulatory mode decision-making’ (STARMODE) based on the theory of decision modelling in policy management and a case study exploring three key market integration issues in the field of electricity markets: interconnector investment, congestion management and market transparency. The main objective is to present a systematic and comprehensive framework for analysing and improving regulatory mode decision-making in the context of the European Union, focusing on electricity market integration. The STARMODE approach is generally applicable to (and relevant for) European market integration issues in industries characterized by a natural monopoly and/or an essential service. The approach may also contribute to national regulatory mode decision-making and multi-state decision-making in other continents