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A Dynamic Incentive Mechanism for Transmission Expansion in Electricity Networks: Theory, Modeling, and Application

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  • Juan Rosell�n
  • Hannes Weigt

Abstract

We propose a price-cap mechanism for electricity-transmission expansion based on redefining transmission output in terms of financial transmission rights. Our mechanism applies the incentive-regulation logic of rebalancing a two-part tariff. First, we test this mechanism in a three-node network. We show that the mechanism intertemporally promotes an investment pattern that relieves congestion, increases welfare, augments the Transco's profits, and induces convergence of prices to marginal costs. We then apply the mechanism to a grid of northwestern Europe and show a gradual convergence toward a common-price benchmark, an increase in total capacity, and convergence toward the welfare optimum.

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Bibliographic Info

Article provided by International Association for Energy Economics in its journal The Energy Journal.

Volume (Year): Volume 32 (2011)
Issue (Month): Number 1 ()
Pages: 119-148

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Handle: RePEc:aen:journl:2011v32-01-a05

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References

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  1. Joskow, P.L., 2003. "The Difficult Transition to Competitive Electricity Markets in the U.S," Cambridge Working Papers in Economics 0328, Faculty of Economics, University of Cambridge.
  2. Tarjei Kristiansen & Juan Rosellón, 2006. "A Merchant Mechanism for Electricity Transmission Expansion," Journal of Regulatory Economics, Springer, vol. 29(2), pages 167-193, 03.
  3. Neuhoff, Karsten & Barquin, Julian & Boots, Maroeska G. & Ehrenmann, Andreas & Hobbs, Benjamin F. & Rijkers, Fieke A.M. & Vazquez, Miguel, 2005. "Network-constrained Cournot models of liberalized electricity markets: the devil is in the details," Energy Economics, Elsevier, vol. 27(3), pages 495-525, May.
  4. Bushnell, James & Stoft, Steven, 1997. "Improving Private Incentives for Electric Grid Investment," Staff General Research Papers 31549, Iowa State University, Department of Economics.
  5. Thomas-Olivier Leautier, 2000. "Regulation of an Electric Power Transmission Company," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 61-92.
  6. Vogelsang, Ingo, 2001. "Price Regulation for Independent Transmission Companies," Journal of Regulatory Economics, Springer, vol. 20(2), pages 141-65, September.
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Citations

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Cited by:
  1. Juan Rosellón & Zdenka Mysliková & Eric Zenón, 2010. "Incentives for Transmission Investment in the PJM Electricity Market: FTRs or Regulation (or Both?)," Discussion Papers of DIW Berlin 1026, DIW Berlin, German Institute for Economic Research.
  2. Hagspiel, Simeon & Jägemann, Cosima & Lindenberger, Dietmar & Brown, Tom & Cherevatskiy, Stanislav & Tröster, Eckehard, 2013. "Cost-Optimal Power System Extension under Flow-Based Market Coupling," EWI Working Papers 2013-9, Energiewirtschaftliches Institut an der Universitaet zu Koeln.
  3. Juan Rosellón & Erix Ruiz, 2011. "Transmission Investment in the Peruvian Electricity Market: Theory and Applications," Documentos de Trabajo DTE 522, CIDE, Division de Economia.
  4. Juan Rosellon & Jonas Egerer & Wolf-Peter Schill, 2013. "Power System Transformation towards Renewables: An Evaluation of Regulatory Approaches for Network Expansion," Documentos de Trabajo DTE 562, CIDE, Division de Economia.
  5. Rosellon, Juan & Tregear, Juan & Zenon, Eric, 2010. "El modelo HRV para expansión óptima de redes de transmisión: una aplicación a la red eléctrica de Ontario
    [The HRV Model for the Optimal Expansion of Transmission Networks: an Application to t
    ," MPRA Paper 26471, University Library of Munich, Germany.
  6. Luis M. Abadie & José M. Chamorro, 2011. "Valuing Expansions of the Electricity Transmission Network under Uncertainty: The Binodal Case," Energies, MDPI, Open Access Journal, vol. 4(10), pages 1696-1727, October.
  7. Juan Rosellón & Eric Zenón, 2010. "Expansión de las redes de transmisión eléctrica en Norteamérica: Teoría y aplicaciones," Documentos de Trabajo DTE 479, CIDE, Division de Economia.
  8. Jonas Egerer & Clemens Gerbaulet & Casimir Lorenz, 2013. "European Electricity Grid Infrastructure Expansion in a 2050 Context," Discussion Papers of DIW Berlin 1299, DIW Berlin, German Institute for Economic Research.
  9. Juan Rosellon & Luis Herrera, 2013. "On Distributive Effects of Optimal Regulation for Power Grid Expansion," Documentos de Trabajo DTE 563, CIDE, Division de Economia.
  10. Anne Neumann & Juan Rosellón & Hannes Weigt, 2011. "Removing Cross-Border Capacity Bottlenecks in the European Natural Gas Market: A Proposed Merchant-Regulatory Mechanism," Discussion Papers of DIW Berlin 1145, DIW Berlin, German Institute for Economic Research.
  11. Juan Rosellón & Wolf-Peter Schill & Jonas Egerer, 2011. "Regulated Expansion of Electricity Transmission Networks: The Effects of Fluctuating Demand and Wind Generation," Documentos de Trabajo DTE 523, CIDE, Division de Economia.

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