Med-TSO defines preliminary criteria for the implementation of a Cross Border Cost Allocation process

Developed starting from the results of the Cost-Benefit Analysis within the Mediterranean Project 1, the general criteria and main guidelines for a Cross Border Cost Allocation (CBCA) process have been defined by Med-TSO with Deliverable 4.2 in the framework of the ongoing Mediterranean Project 2. This deliverable has been finalized by the Technical Committee “International Electricity Exchanges”, chaired by Mr. Aziz Ameyoud (OS -Algeria), in cooperation with the Technical Committee “Regulation and Institutions”, chaired by Mr. Juan Manuel Rodriguez (REE – Spain), and has been shared with MedReg, the association of Mediterranean Energy Regulators, for achieving a common position for future applications in the Mediterranean context.

The procedure outlined in this report represents a significant step towards completing the entire Cost-Benefit Analysis (CBA) process, aiming at evaluating benefits and costs of the projects studied by Med-TSO, defining also for each of them the relevant potential risks. The proposed CBCA criteria will be applied for completing the Cost-Benefit Analysis carried out in the “Master Plan of Mediterranean Interconnections 2020” that will be delivered in the third quarter of 2020. Through the outlined CBCA process, it will be possible to tackle some of the main issues and challenges that may occur while developing new interconnection projects related to:

• different regulatory frameworks existing in the host countries;
• need to identify all of the participating countries, i.e. other possible beneficiaries that could join alongside the host countries;
• level of participation and associated regulations for sharing costs, benefits and risks;
• uncertainties on the perimeter of interconnection project costs to be shared;
• criteria for allocating the interconnection capacity and whether or not it has to be based on market rules;
• finally, additional transmissions costs, including transmission losses and hosting flows.

After careful consideration and planning, it was decided to test these guidelines through a number of pre-selected case study clusters, using two methods of measurement that are strictly in accordance with the recommendations of the European Agency for the Cooperation of Energy Regulator (ACER). The case study clusters were defined as: -Morocco and Portugal -Algeria and Spain -Tunisia and Italy -Egypt and Jordan -Greece, Turkey, and Bulgaria Method 1 uses the net impact of a project, calculated as the project Social Economic Welfare (SEW) minus its associated losses. It defines a threshold of 10% as the sum of all the national net impacts and identifies the countries having a net impact above such a threshold. The possible level of participation is then calculated proportionally to each country excess of net impact over the defined threshold. Method 2 uses the net impact of a project as the Net Present Value (NPV) at the national perimeter, i.e. NPV of the cash flows associated with Social Economic Welfare, losses, CAPital Expenditures (CAPEX), and OPerational Expenditures (OPEX). The need for contribution or participation by a country is quantified based on the sum of the negative net impacts of the hosting countries. Findings of the two methods resulted in compatible outcomes in terms of identified participants and quantified level of their participation to costs. However, Method 2 proves to bring in additional information for quantifying compensation, where required. Finally, it should also be noted that in most of the analyzed cases, non-hosting TSOs also qualified as participants as neighboring non-hosting TSOs. With this CBCA mechanism established and successfully tested, Med-TSO has taken a major step in its efforts to promote the establishment of a harmonized power system across the Mediterranean. The work carried out so far should be considered as the basis for setting up a transparent and clear framework for evaluating projects and enable cross-border dialogue. Med-TSO will continue working jointly with MedReg on a transparent and competitive regulatory framework with a view to ensuring an interoperated and interconnected electricity market in the Mediterranean region.