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Merchant Transmission Investment

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  • Joskow, P.
  • Tirole, J.

Abstract

We 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 Info

Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0324.

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Date of creation: May 2003
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Handle: RePEc:cam:camdae:0324

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  13. Bushnell, James & Stoft, Steven, 1997. "Improving Private Incentives for Electric Grid Investment," Staff General Research Papers 31549, Iowa State University, Department of Economics.
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  22. Joskow, Paul L & Tirole, Jean, 1999. "Transmission Rights and Market Power on Electric Power Networks I: Financial Rights," CEPR Discussion Papers 2093, C.E.P.R. Discussion Papers.
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