Capacity Allocation Auctions for Interconnectors

1. Meaning

Capacity Allocation Auctions for Interconnectors are market and regulatory mechanisms used to allocate limited electricity-transfer capacity between different countries, regions, or electricity markets.

An interconnector is a transmission line that connects two electricity systems. Because an interconnector has a limited physical capacity, not every market participant can use it at the same time. Auctions can therefore be used to allocate the available capacity in a transparent and competitive manner.

For example, if an interconnector can transfer 1,000 MW but market participants collectively request 1,500 MW, an allocation mechanism is needed to determine who receives the available capacity.

2. Purpose of Interconnector Auctions

The main objectives are:

efficient use of scarce transmission capacity;

transparent allocation;

prevention of discriminatory access;

efficient cross-border electricity trading;

reduction of congestion;

promotion of competition; and

recovery of appropriate network costs.

Interconnector capacity allocation is therefore closely connected with electricity-market design and competition law.

3. Types of Capacity Allocation

Explicit Auctions

In an explicit auction, participants separately acquire the right to use transmission capacity.

The participant may then separately buy or sell electricity in the relevant electricity market.

Implicit Auctions

Under implicit allocation, electricity and transmission capacity are effectively allocated together through market coupling.

The electricity market-clearing process determines both the electricity flow and the value of scarce interconnector capacity.

Implicit allocation can improve efficiency because electricity tends to flow from lower-priced areas toward higher-priced areas, subject to network constraints.

4. Auction Process

A typical auction involves several stages:

The system operator determines available transfer capacity.

The available capacity is published.

Eligible market participants submit bids.

Bids are processed according to the auction rules.

Capacity is allocated.

Participants pay the applicable auction or congestion price.

Physical flows are scheduled.

Compliance and settlement are completed.

The methodology must account for transmission security because the commercially allocated capacity cannot exceed what the network can safely transfer.

5. Congestion and Scarcity

Interconnector auctions become particularly important when transmission capacity is scarce.

Suppose Region A has a low electricity price while Region B has a high price. Traders will seek to transfer electricity from A to B.

If the interconnector becomes congested, the available capacity acquires economic value.

The difference between electricity prices in the two markets can therefore provide an indication of the value of scarce transmission capacity.

6. Regulatory Framework

A strong legal framework should address:

access eligibility;

auction design;

bidding rules;

capacity calculation;

congestion management;

transparency;

market manipulation;

settlement;

outage arrangements; and

dispute resolution.

Regulators must also ensure that dominant market participants do not manipulate capacity auctions by withholding capacity or submitting strategic bids.

7. Competition Law

Interconnector capacity can be an economically important infrastructure resource.

Competition authorities may therefore examine:

discriminatory access;

capacity hoarding;

exclusionary conduct;

abuse of market power;

anti-competitive agreements; and

manipulation of auctions.

Open and transparent allocation helps reduce these risks.

8. Relevant Case Laws

In C-17/03 Vereniging voor Energie, Milieu en Water v Directeur van de Dienst uitvoering en toezicht energie [2005] ECR I-4983, the Court of Justice of the European Union considered electricity-market access and regulatory arrangements. The case is relevant to the broader principle that access to electricity infrastructure must operate within an appropriate regulatory framework.

In C-280/00 Altmark Trans GmbH v Regierungspräsidium Magdeburg [2003] ECR I-7747, the CJEU established principles concerning state support and public-service compensation. Although the case was not directly about interconnector auctions, it is relevant when governments provide financial support or compensation associated with electricity infrastructure.

In PTC India Ltd v Central Electricity Regulatory Commission (2010) 4 SCC 603, the Supreme Court of India considered the regulatory powers of CERC and the legal framework governing electricity-market regulations. The case supports the principle that market-allocation mechanisms must operate within statutory regulatory authority.

In West Bengal Electricity Regulatory Commission v CESC Ltd (2002) 8 SCC 715, the Supreme Court recognised the importance of specialised electricity regulation. This principle is relevant when regulators design technically complex transmission-allocation systems.

9. South African Perspective

South Africa's electricity system is increasingly connected to regional electricity markets through the Southern African Power Pool (SAPP).

Cross-border transmission arrangements create questions concerning:

available transfer capacity;

regional congestion;

transmission charges;

access rights;

market coupling;

reliability; and

allocation of scarce transmission capacity.

South African electricity regulation must therefore coordinate domestic electricity law with regional trading arrangements.

The Electricity Regulation Act 4 of 2006 provides an important domestic legal foundation for electricity regulation, while regional arrangements require cooperation between participating electricity systems.

10. Importance for Renewable Energy

Interconnector auctions are increasingly important for renewable-energy integration.

Countries or regions with strong wind, solar, or hydro resources can export electricity to areas experiencing shortages.

Interconnection can therefore:

diversify renewable supply;

reduce dependence on local generation;

improve system flexibility;

support regional electricity markets; and

contribute to decarbonisation.

However, cross-border transm