Social Welfare

From the beginning of the process to liberalise Europe’s electricity sector, there has been much debate on the treatment of interconnector capacity. Early emphasis focused on ensuring as much capacity as possible was sold on an open market (e.g. day ahead) to optimise its use and reduce the risk of it not being used when market prices in connected electricity markets suggested it should have been (i.e. to the reduce the risk of sterilisation).
 
More recently, debate has turned to the extent to which capacity should be used for the exchange of balancing services. Presumably linked to the desire to avoid sterilisation, there appears to be a consensus emerging in favour of a prohibition
on the reservation of capacity from the day ahead market for the purposes of balancing exchange. However, some parties (including the EU) have expressed the view that there might be a case for allowing such reservations if it can be shown that this would increase social welfare.

The report presented here therefore examines the extent to which allowing the reservation of interconnector capacity for the exchange of balancing services might increase social welfare.