The implication of the European inter-TSO compensation mechanism for cross-border electricity transmission investments

•The effect of ITC mechanism on cross-border electricity transmission investments.•An investment model that includes ITC in a multi-TSO setting introduced.•There is a loose link between ITC and cross-border transmission investments.•The link can be tightened by increasing the size of the ITC fund.•High ITC fund size can lead to under-investment.

An efficient cross-border investment and well-designed markets and regulatory instruments are crucial prerequisites to the creation of a fully functional European internal electricity market. One of the prominent regulatory measures taken to speed up the creation of the internal market was to abolish tariff pancaking by replacing cross-border tariffs with an Inter-Transmission System Operators Compensation (ITC) mechanism through which transmission system operators (TSOs) can compensate each other. In this study, the implication of introducing such mechanism on the cross-border investment outcome is explored. The results indicate that the current ITC mechanism is loosely linked to the cross-border investment decisions of TSOs. In addition, the study concludes that factors such as the ITC fund size and the number of participating TSOs can influence the investment outcome.