Merchant interconnector projects by generators in the EU : effects on profitability and allocation of capacity

When building a cross-border transmission line (a so-called interconnector) as a for-profit (merchant)
project, where the regulator has required that capacity allocation be done non-discriminatorily by
explicit auction, the identity of the investor can affect the profitability of the interconnector project
and, once operational, the resulting allocation of its capacity. Specifically, when the investor is a
generator (hereafter the integrated generator) who also can use the interconnector to export its
electricity to a distant location, then, once operational, the integrated generator will bid more
aggressively in the allocation auctions to increase the auction revenue and thus its profits. As a result,
the integrated generator is more likely to win the auction and the capacity is sold for a higher price.
This lowers the allocative efficiency of the auction, but it increases the expected ex-ante profitability
of the merchant interconnector project. Unaffiliated, independent generators, however, are less likely
to win the auction and, in any case, pay a higher price, which dramatically lowers their revenues from
exporting electricity over this interconnector.