Volume 2 Number 5 October 2019 (458-465) DOI: 10.14171/j.2096-5117.gei.2019.05.011 Production And Global Energy Interconnection Hosting By Elsevier On Behalf Of KeAi Contents lists available at ScienceDirect https://www.sciencedirect.com/journal/global-energy-interconnection Full-length article Analysis of profit models for cross-border power interconnection projects Jing Li1, Guowei Gao1, Li Ma1, Tian Zhao1, Haoyuan Qu1, Fu Chen2 1. State Grid Energy Research Institute Co., Ltd, Beijing 102209, P.R. China 2. Global Energy Interconnection Development and Cooperation Organization, Xicheng District, Beijing 100031, P.R. China Scan for more details Abstract: With the increasing demand worldwide for power grid interconnection, a growing number of related projects are under planning or construction. Despite the rapid growth of cross-border interconnection projects, the systematic research on profit models for these projects is insufficient. This paper first analyzes the profit sources of interconnection projects. Based on the analysis results, profit models are considered under different regulatory systems for three types of cross- border interconnection projects: fully market-oriented, semi-marketization, and fully supervised. Finally, measures for increasing the profitability and sustainable development of power interconnection projects are proposed. Keywords: Profit model, Power interconnection, Regulatory system, Physical transmission rights, Financial transmission rights. 1 Introduction International Energy Agency (IEA) statistics, global cross- border power transactions totaled 726 billion kWh, which Cross-border power interconnection projects play an is an increase of 34% from 541.6 billion kWh in 2004, with important role in optimizing energy resource allocation, an average annual growth rate of about 3%. This is higher promoting low-carbon development, and consolidating than the 1.5% average annual growth rate of international energy security worldwide. With the expansion of power oil trade at the same time [1]. Compared with domestic interconnection around the world, the scale of cross-border power transmission projects, power interconnection power transactions is rapidly increasing. According to 2016 projects involve political, economic, legal, and regulatory coordination between two countries. Therefore, the profit model is more complicated. Despite the rapid growth of cross-border power transactions, their proportion of the total electricity Received: 18 June 2019/ Accepted: 20 July 2019/ Published: 25 October consumption was still only 3% in 2016. Therefore, cross- 2019 border interconnection projects have attracted relatively little attention, and related academic research has mainly Jing Li Tian Zhao [email protected] [email protected] focused on the profile and trends of cross-border power interconnection [2-4], project operation [5], comprehensive Guowei Gao Haoyuan Qu [email protected] [email protected] socioeconomic benefits for interconnection projects [6-7], Li Ma Fu Chen etc. Systematic research on project profit models is [email protected] [email protected] insufficient. With the gradual development of global energy 2096-5117/© 2019 Global Energy Interconnection Development and Cooperation Organization. Production and hosting by Elsevier B.V. on behalf of KeAi Communications Co., Ltd. This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/ ). 458 Jing Li et al. Analysis of profit models for cross-border power interconnection projects interconnection (GEI), the scale of power interconnection in 17 countries in Europe and is responsible for the capacity will increase in the future, and the number of related auction of 27 transnational transmission channels across the projects will also increase. This trend requires research on continent. Before the opening of the day-ahead electricity business models for power interconnection projects, and an market, successful bidders need to submit a transmission innovative, diversified, and sustainable profit pattern needs plan for the next day to the corresponding TSO according to be designed based on current experience. to their obtained transmission capacity. The unused This paper first summarizes the typical operation transmission capacity is recovered without compensation experiences for cross-border power interconnection projects and then used in the implicit auction. The successful bidder in Europe and North America and then analyzes the can also transfer its holding capacity to other market entities compositions of revenue and cost for these projects. On this in the secondary market. The fees obtained through the basis, fully market-oriented, semi-marketization, and fully transfer are paid to the TSOs. supervised cross-border power interconnection projects are (2) Implicit auction analyzed respectively, and their profit models are considered In an implicit auction, the transmission capacity is under different regulatory systems. Finally, a profit model is auctioned simultaneously with the energy market, and a proposed for cross-border power interconnection projects in separate auction for physical transmission rights is not the context of GEI. performed. This auction is used in the day-ahead market. The cross-border transmission capacity is used as a 2 Revenue and cost of cross-border power constraint to optimize the clearing model so that the clearing interconnection projects results can meet the physical constraints of the networks. The process and principle of the implicit auction are 2.1 Revenue as follows. First, the power dispatching institute issues the According to current operation experiences in Europe available transmission capacity (ATC) of the cross-border and the United States, the revenue for most cross-border transmission channel to the power exchange institute. power interconnection projects comes from auctions of Market members submit electricity quotes according to physical transmission rights and financial transmission their needs (these quotes do not include the price of the rights, fixed electricity tariffs, and others. transmission rights). The market clearing model is used for 2.1.1 Revenue from physical transmission rights joint optimization of multiple countries or price zones by In some countries or regions, especially in Europe, taking the capacity of transnational transmission lines as a cross-border power trading requires the purchase of physical constraint. Thus, the transactions of market members are transmission rights with the corresponding capacity. In the obtained in different countries or price ranges along with the European electricity market, to ensure the implementation transmission plans for each cross-border transmission line. of electricity contracts, market members need to purchase When a cross-border transmission channel is not blocked, a cross-border physical transmission rights from multinational market with lower prices will export to an adjacent market transmission system operators (TSOs) and then submit the with higher prices, so the marginal clearing prices of both transmission plans to the TSOs of the sending and receiving markets are equal, as illustrated in Fig. 1. In contrast, a countries within a specified period of time. There are two price difference is generated between adjacent markets, major methods for auctioning physical transmission rights which leads to a certain blocking income (i.e., congestion in Europe: explicit and implicit. revenue), as illustrated in Fig. 2. This revenue is distributed (1) Explicit auction to investors in cross-border interconnection projects. An explicit auction refers to the sale of all or part of the At present, the cross-border transmission capacity is cross-border transmission capacity by multinational TSOs distributed through both explicit and implicit auctions in through annual and monthly public auctions. In general Europe. Explicit auctions are mainly used for cross-border explicit auctions, auction participants submit the purchase long-term power transactions, while implicit auctions are intention and quotation of the transmission capacity on the mainly used in the day-ahead joint market. In addition, for transaction platform, and deals are made according to the different cross-border transmission projects, the regulatory order of quotation from high to low. An explicit auction is institute can also choose suitable capacity distribution usually completed before a power spot market is opened. methods. For example, the Spanish–Portuguese border The European auction of cross-border physical project was approved to use long-term implicit auctions, transmission rights is organized by the Joint Allocation and the Estonian–Latvian and Danish–German border Office (JAO), which is an organization that serves 20 TSOs projects adopted long-term explicit auctions. In recent years, 459 Global Energy Interconnection Vol. 2 No. 5 Oct. 2019 P (€/MWh) P (€/MWh) Market A Market B Purchase Purchase Purchase 0 1 Import PB Export PA* = PB* PA* PA Sale Sale Sale 0 1 QA QA* Q (MWh) QB QB* Q (MWh) Fig. 1 Schematic diagram of market coupling without congestion P (€/MWh)P (€/MWh) Market A Market B (Export = ATC) (Export = ATC) Purchase0 Purchase Purchase 1 ATC PB PB* ATC Price difference input determination PA* congestion revenue PA Sale0 Sale Sale 1 QA QA* Q (MWh) QB QB* Q (MWh) Fig. 2 Schematic diagram of market coupling with congestion with the acceleration of the construction of a unified