The political economy of the inter TSO compensation mechanism

The Inter TSO mechanism (ITC), as required by EU legislation, is supposed to link the cost of international transit flows to the local network tariffs. The design of the mechanism includes a number of technical problems and challenges which has proven difficult and time consuming to agree upon solutions for. We argue that the current ITC mechanism at best only partially will succeed with the pronounced aim to support the development of the internal energy market (IEM). The discussions have come to focus on compensation for existing infrastructure instead of future requirements. Thus the amount of support is marginal in relation to the expected required investments. We elaborate on alternative designs based on congestion rents focusing on the basic needs, i.e. more cross border capacity.