This study examines the development of a transparent, cost-reflective and non-discriminatory mechanism for compensating Transmission System Operators (TSOs) for the costs associated with cross-border electricity flows in the European electricity market. It evaluates alternative methodologies for determining and allocating transmission network costs, with the objective of improving the existing inter-TSO compensation (ITC) mechanism.
The study recommends extending compensation beyond transit flows to all cross-border electricity flows, ensuring equitable cost allocation and consistency with an integrated European electricity market. It proposes using forward-looking, long-run average incremental costs (LRAIC), standardised infrastructure costs and a defined Horizontal Network to assess the transmission infrastructure affected by international electricity exchanges.
After comparing several cost-allocation methodologies, the study identifies the Average Participations (AP) method as the most appropriate approach, given its transparency, technical robustness, consistency with physical electricity flows and ability to allocate network costs independently of national borders.
Numerical simulations using European transmission data demonstrate the feasibility of the proposed methodology and reveal substantial differences in compensation payments compared with the existing ETSO mechanism.
Overall, the study concludes that although no compensation methodology can achieve perfect objectivity, the Average Participations approach provides a sound and economically meaningful basis for fair, transparent, and efficient cross-border transmission cost allocation, supporting the development of an integrated electricity market.
