The European Target Model and the impact of implicit auctions on interconnection capacity prices

This paper studies the impact of the European Target Model (ETM) on day-ahead electricity interconnection capacity prices between Great Britain (GB) and France (FR). We implement an econometric approach using data from the Interconnection-France-Angleterre (IFA); such an approach controls for factors that may influence prices besides the ETM. The modelling indicates that the target model raised day-ahead capacity prices for the direction FR→GB by €7.45 to €8.07/MWh. Results for the GB→FR direction are sensitive to the model used, but range from €0.475/MWh to €10.65/MWh, with the higher value coming from a censored regression model. Using the model's prediction, adding capacity of 1000MW would roughly reduce prices by €6. Gas price differentials account for about €1 of the interconnection price. The overall indication is that the ETM has achieved some of its initial goals in allowing interconnection prices to rise and more fully reflect congestion rents and the need for investment. Our work should be taken as preliminary, as many factors, such as long-term contracts, may further influence conclusions.