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Do generation firms in restructured electricity markets have incentives to support social-welfare-improving transmission investments?

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  • Sauma, Enzo E.
  • Oren, Shmuel S.
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    Abstract

    This paper examines the incentives that generation firms have in restructured electricity markets for supporting long-term transmission investments. In particular, we study whether generation firms, which arguably play a dominant role in the restructured electricity markets, have the incentives to fund or support incremental social-welfare-improving transmission investments. We examine this question in a two-node network and explore how such incentives are affected by the ownership of financial transmission rights (FTRs) by generation firms. In the analyzed two-node network, we show both (i) that the net exporter generation firm has the correct incentives to increase the transmission capacity incrementally up to a certain level and (ii) that, although a policy that allocates FTRs to the net exporter generation firm can be desirable from a social point of view, such a policy would dilute the net-importer-generation-firm's incentives to support transmission expansion. Moreover, if all FTRs were allocated or auctioned off to the net exporter generation firm, then it is possible to increase both consumer surplus and social welfare while keeping the net exporter generation firm revenue neutral.

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    Bibliographic Info

    Article provided by Elsevier in its journal Energy Economics.

    Volume (Year): 31 (2009)
    Issue (Month): 5 (September)
    Pages: 676-689

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    Handle: RePEc:eee:eneeco:v:31:y:2009:i:5:p:676-689

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    Web page: http://www.elsevier.com/locate/eneco

    Related research

    Keywords: Transmission investment incentives Market power Financial transmission rights Power systems economics;

    References

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    1. Cardell, Judith B. & Hitt, Carrie Cullen & Hogan, William W., 1997. "Market power and strategic interaction in electricity networks," Resource and Energy Economics, Elsevier, vol. 19(1-2), pages 109-137, March.
    2. Paul Joskow & Jean Tirole, 2003. "Merchant Transmission Investment," Working Papers 0304, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
    3. Enzo Sauma & Shmuel Oren, 2006. "Proactive planning and valuation of transmission investments in restructured electricity markets," Journal of Regulatory Economics, Springer, vol. 30(3), pages 261-290, November.
    4. Severin Borenstein & James Bushnell & Steven Stoft, 1997. "The Competitive Effects of Transmission Capacity in a Deregulated Electricity Industry," NBER Working Papers 6293, National Bureau of Economic Research, Inc.
    5. Steven Stoft, 1999. "Financial Transmission Rights Meet Cournot: How TCCs Curb Market Power," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 1-23.
    6. Shmuel S. Oren, 1997. "Economic Inefficiency of Passive Transmission Rights in Congested Electricity Systems with Competitive Generation," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 63-83.
    7. Hogan, William W, 1992. "Contract Networks for Electric Power Transmission," Journal of Regulatory Economics, Springer, vol. 4(3), pages 211-42, September.
    8. Bushnell, James B & Stoft, Steven E, 1996. "Electric Grid Investment under a Contract Network Regime," Journal of Regulatory Economics, Springer, vol. 10(1), pages 61-79, July.
    9. Enzo Sauma & Shmuel Oren, 2006. "Proactive planning and valuation of transmission investments in restructured electricity markets," Journal of Regulatory Economics, Springer, vol. 30(3), pages 358-387, November.
    10. Barmack, Matthew & Griffes, Peter & Kahn, Edward & Oren, Shmuel, 2003. "Performance Incentives for Transmission," The Electricity Journal, Elsevier, vol. 16(3), pages 9-22, April.
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    Citations

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    Cited by:
    1. 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.
    2. Ruderer, D., 2012. "The Impact of Transmission Pricing in Network Industries," Cambridge Working Papers in Economics 1230, Faculty of Economics, University of Cambridge.
    3. Pollitt, M. J., 2011. "Lessons from the History of Independent System Operators in the Energy Sector, with applications to the Water Sector," Cambridge Working Papers in Economics 1153, Faculty of Economics, University of Cambridge.
    4. Felix Höffler & Achim Wambach, 2013. "Investment coordination in network industries: the case of electricity grid and electricity generation," Journal of Regulatory Economics, Springer, vol. 44(3), pages 287-307, December.
    5. Billette de Villemeur, Etienne & Pineau, Pierre-Olivier, 2012. "Regulation and electricity market integration: When trade introduces inefficiencies," MPRA Paper 41251, University Library of Munich, Germany.
    6. Andreas Schröder & Maximilian Bracke, 2012. "Integrated Electricity Generation Expansion and Transmission Capacity Planning: An Application to the Central European Region," Discussion Papers of DIW Berlin 1250, DIW Berlin, German Institute for Economic Research.
    7. Grimm, Veronika & Martin, Alexander & Weibelzahl, Martin & Zöttl, Gregor, 2014. "Transmission and Generation Investment in Electricity Markets: The Effects of Market Splitting and Network Fee Regimes," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 460, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    8. Grimm, Veronika & Martin, Alexander & Weibenzahl, Martin & Zoettl, Gregor, 2014. "Transmission and generation investment in electricity markets: The effects of market splitting and network fee regimes," IWQW Discussion Paper Series 04/2014, Friedrich-Alexander-Universität Erlangen-Nürnberg, Institut für Wirtschaftspolitik und Quantitative Wirtschaftsforschung (IWQW).
    9. Marcelo Saguan & Leonardo Meeus, 2011. "Modeling the Cost of Achieving a Renewable Energy Target: Does it Pay to Cooperate Across Borders?," RSCAS Working Papers 2011/46, European University Institute.
    10. de Hauteclocque, Adrien & Rious, Vincent, 2011. "Reconsidering the European regulation of merchant transmission investment in light of the third energy package: The role of dominant generators," Energy Policy, Elsevier, vol. 39(11), pages 7068-7077.
    11. Adrien de Hauteclocque & Vincent Rious, 2009. "Reconsidering the Regulation of Merchant Transmission Investment in the Light of the Third Energy Package: The Role of Dominant Generators," RSCAS Working Papers 2009/59, European University Institute.

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