Monday, September 10, 2012
Market Integration and Economic Efficiency at Conflict? Commitments in the Swedish Interconnectors Case
Posted by D. Daniel Sokol
M. Sadowska and Bert Willems, (Tilburg University, Tilburg Law and Economics Center) ask Market Integration and Economic Efficiency at Conflict? Commitments in the Swedish Interconnectors Case.
ABSTRACT: Abstract: According to the European Commission, Svenska Kraftnat, the Swedish network operator, might have violated competition rules by limiting cross-border transmission capacity to relieve congestion within Sweden. Eventually, the case was settled and Svenska Kraftnat offered commitments to address the Commissionâ€™s concerns. As an interim remedy, it committed to reduce transmission flow of electricity on internal network bottlenecks primarily by introducing national measures and by not reducing interconnection capacity. As a final remedy, Svenska KraftnÃ¤t agreed to split the Swedish market into multiple price zones. Congestion within Sweden would then be solved by adjusting the prices of those zones. We analyse the economic effects of the alleged abuse and the remedy package. We make three observations. Firstly, it might be socially optimal to reduce cross-border capacity in response to internal congestion. Hence, without an in-depth economic analysis the Commission risked preventing efficient behaviour. Secondly, the interim remedy of handling internal congestion primarily by national measures is not socially optimal, and it cannot be ruled out that it reduces overall welfare. Thirdly, even though splitting the market into price zones may improve allocative efficiency within Sweden, it does not prevent Svenska KraftnÃ¤t from potential manipulation of cross-border transmission capacity.