Merchant interconnectors in Europe : merits and value drivers

Interconnectors can help the European Union (EU) resolve the energy trilemma, increasing security of supply, supporting the transition to a low carbon economy and favouring price convergence. The EU should rely more on merchant interconnectors, which are financed by private funds on a non-regulated basis. As interconnectors are replicable assets, they could avoid being regulated. Compared to the regulated model, the merchant model provides appropriate incentives to invest, to manage costs, to build on time and to make the asset available. However, there are only few merchant interconnectors in the EU. The ElecLink project between France and Great Britain is expected to be the next to be commissioned, in 2020. The main source of revenue for a merchant interconnector is the congestion rent, which has three main drivers: it increases with the average price differential (structural value) and the volatility of prices (volatility value) and decreases with the correlation between prices. The expanding share of renewable energy, from various sources and locations, increases the volatility of prices and creates value for interconnectors.