Merchant Transmission Investment
AbstractWe examine the performance attributes of a merchant transmission investment framework that relies on ‘market driven’ transmission investment to provide the infrastructure to support competitive wholesale markets for electricity. Under a stringent set of assumptions, the merchant investment model appears to solve the natural monopoly problem and the associated need for regulating transmission companies traditionally associated with electric transmission networks. We expand the model to incorporate imperfection in wholesale electricity markets, lumpiness in transmission investment opportunities, stochastic attributes of transmission networks and associated property rights definition issues, the effects of the behaviour system operators and transmission owners on transmission capacity and reliability, co-ordination and bargaining considerations, forward contract, commitment and asset specificity issues. This significantly undermines the attractive properties of the merchant investment model. Relying primarily on a market driven investment framework to govern investment is likely to lead to inefficient investment decisions and undermine the performance of competitive markets.
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Bibliographic InfoPaper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0324.
Date of creation: May 2003
Date of revision:
Note: CMI24, IO
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Web page: http://www.econ.cam.ac.uk/index.htm
Other versions of this item:
- Paul Joskow & Jean Tirole, 2003. "Merchant Transmission Investment," Working Papers 0304, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
- Joskow, Paul & Tirole, Jean, 2004. "Merchant Transmission Investment," IDEI Working Papers 263, Institut d'Économie Industrielle (IDEI), Toulouse.
- Paul Joskow & Jean Tirole, 2003. "Merchant Transmission Investment," NBER Working Papers 9534, National Bureau of Economic Research, Inc.
- L9 - Industrial Organization - - Industry Studies: Transportation and Utilities
- L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
- L5 - Industrial Organization - - Regulation and Industrial Policy
- D4 - Microeconomics - - Market Structure and Pricing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-06-16 (All new papers)
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