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Merchant Transmission Investment

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Author Info
Joskow, P.
Tirole, J.

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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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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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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Holmstrom, Bengt & Tirole, Jean, 2000. "Liquidity and Risk Management," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(3), pages 295-319, August.
  2. 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.
  3. Oren, Shmuel S. & Spiller, Pablo T. & Varaiya, Pravin & Wu, Felix, 1995. "Nodal prices and transmission rights: A critical appraisal," The Electricity Journal, Elsevier, vol. 8(3), pages 24-35, April. [Downloadable!] (restricted)
  4. Thomas-Olivier Leautier, 2000. "Regulation of an Electric Power Transmission Company," The Energy Journal, International Association for Energy Economics, vol. 21(4), pages 61-92.
  5. 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. [Downloadable!] (restricted)
  6. Robert Wilson, 2002. "Architecture of Power Markets," Econometrica, Econometric Society, vol. 70(4), pages 1299-1340, July. [Downloadable!] (restricted)
  7. Roger E. Bohn & Michael C. Caramanis & Fred C. Schweppe, 1984. "Optimal Pricing in Electrical Networks over Space and Time," RAND Journal of Economics, The RAND Corporation, vol. 15(3), pages 360-376, Autumn. [Downloadable!] (restricted)
  8. Bushnell, James, 1999. "Transmission Rights and Market Power," The Electricity Journal, Elsevier, vol. 12(8), pages 77-85, October. [Downloadable!] (restricted)
  9. Green, Richard, 1997. "Transmission pricing in England and Wales," Utilities Policy, Elsevier, vol. 6(3), pages 185-193, September. [Downloadable!] (restricted)
  10. Bushnell, James B. & Stoft, Steven E., 1997. "Improving private incentives for electric grid investment," Resource and Energy Economics, Elsevier, vol. 19(1-2), pages 85-108, March. [Downloadable!] (restricted)
  11. Wu, Felix, et al, 1996. "Folk Theorems on Transmission Access: Proofs and Counterexamples," Journal of Regulatory Economics, Springer, vol. 10(1), pages 5-23, July.
  12. Green, Richard, 1999. "The Electricity Contract Market in England and Wales," Journal of Industrial Economics, Blackwell Publishing, vol. 47(1), pages 107-24, March. [Downloadable!] (restricted)
  13. Aghion, Philippe & Bolton, Patrick, 1987. "Contracts as a Barrier to Entry," American Economic Review, American Economic Association, vol. 77(3), pages 388-401, June.
  14. Paul L. Joskow, 2003. "Electricity Sector Restructuring And Competition - Lessons Learned," Working Papers 0314, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research. [Downloadable!]
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  15. Chao, Hung-Po & Peck, Stephen, 1996. "A Market Mechanism for Electric Power Transmission," Journal of Regulatory Economics, Springer, vol. 10(1), pages 25-59, July.
  16. Vogelsang, Ingo, 2001. "Price Regulation for Independent Transmission Companies," Journal of Regulatory Economics, Springer, vol. 20(2), pages 141-65, September. [Downloadable!] (restricted)
  17. Hogan, William W, 1992. "Contract Networks for Electric Power Transmission," Journal of Regulatory Economics, Springer, vol. 4(3), pages 211-42, September.
  18. Steven Stoft, 1999. "Financial Transmission Rights Meet Cournot: How TCCs Curb Market Power," The Energy Journal, International Association for Energy Economics, vol. 20(1), pages 1-24.
  19. Joshua S. Gans & Stephen P. King, 2000. "Options for Electricity Transmission Regulation in Australia," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 33(2), pages 145-160. [Downloadable!] (restricted)
  20. Bengt Holmstrom, 1982. "Moral Hazard in Teams," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 324-340, Autumn. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Brunekreeft, G. & Neuhoff, K. & Newbery, D., 2004. "Electricity transmission: an overview of the current debate," Cambridge Working Papers in Economics 0463, Faculty of Economics, University of Cambridge. [Downloadable!]
    Other versions:
  2. Richard O’Neill & Emily Fisher & Benjamin Hobbs & Ross Baldick, 2008. "Towards a complete real-time electricity market design," Journal of Regulatory Economics, Springer, vol. 34(3), pages 220-250, December. [Downloadable!] (restricted)
  3. Makoto TANAKA, 2005. "Optimal Transmission Capacity under Nodal Pricing and Incentive Regulation for Transco," Discussion papers 05021, Research Institute of Economy, Trade and Industry (RIETI). [Downloadable!]
  4. Paul L. Joskow, 2003. "The Difficult Transition to Competitive Electricity Markets in the U.S," Working Papers 0308, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research. [Downloadable!]
    Other versions:
  5. Juan Pablo Montero & Salvador Valdés, 2004. "Notas para una Regulación Eficiente de la Transmisión Eléctrica," Cuadernos de Economía (Latin American Journal of Economics), Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 41(123), pages 255-283. [Downloadable!]
    Other versions:
  6. Isamu Matsukawa, 2005. "The Effects of Average Revenue Regulation on Electricity Transmission Investment and Pricing," Industrial Organization 0512009, EconWPA. [Downloadable!]
    Other versions:
  7. Paul L. Joskow, 2005. "Markets For Power In The United States - An Interim Assessment," Working Papers 0512, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research. [Downloadable!]
    Other versions:
  8. Ingo Vogelsang, 2005. "Electricity Transmission Pricing and Performance-Based Regulation," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  9. Gert Brunekreeft & David Newbery, 2006. "Should merchant transmission investment be subject to a must-offer provision?," Journal of Regulatory Economics, Springer, vol. 30(3), pages 233-260, November. [Downloadable!] (restricted)
    Other versions:
  10. Vincent Rious & Yannick Perez & Philippe Dessante, 2008. "Is combination of nodal pricing and average participation tariff the best solution to coordinate the location of power plants with lumpy transmission investments?," Post-Print hal-00323878_v1, HAL. [Downloadable!]
    Other versions:
  11. Brunekreeft, G., 2004. "‘Regulatory Issues in Merchant Transmission Investment’," Cambridge Working Papers in Economics 0422, Faculty of Economics, University of Cambridge. [Downloadable!]
  12. Littlechild, S., 2004. "Regulated and merchant interconnectors in Australia: SNI and Murraylink revisited," Cambridge Working Papers in Economics 0410, Faculty of Economics, University of Cambridge. [Downloadable!]
  13. Ujjayant Chakravorty & Eithan Hochman & Chieko Umetsu & David Zilberman, 2004. "Privatizing Water Distribution," Emory Economics 0403, Department of Economics, Emory University (Atlanta). [Downloadable!]
  14. Fischbeck, Paul & Vajjhala, Shalini, 2006. "Quantifying Siting Difficulty: A Case Study of U.S. Transmission Line Siting," Discussion Papers dp-06-03, Resources For the Future. [Downloadable!]
    Other versions:
  15. Littlechild, S.C. & Skerk, C.J., 2004. "Regulation of transmission expansion in Argentina Part I: State ownership, reform and the Fourth Line," Cambridge Working Papers in Economics 0464, Faculty of Economics, University of Cambridge. [Downloadable!]
  16. Andrew Kleit & James Reitzes, 2008. "The effectiveness of FERC’s transmission policy: is transmission used efficiently and when is it scarce?," Journal of Regulatory Economics, Springer, vol. 34(1), pages 1-26, August. [Downloadable!] (restricted)
  17. repec:mop:credwp:09.04.83 is not listed on IDEAS
  18. Paul L. Joskow, 2004. "Transmission Policy in the United States," Working Papers 0417, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research. [Downloadable!]
    Other versions:
  19. Adrien De Hauteclocque & Vincent Rious, 2008. "Regulatory Uncertainty and Inefficiency for the Development of Merchant Lines in Europe," Post-Print hal-00338296_v1, HAL. [Downloadable!]
  20. Littlechild, S.C. & Skerk, C.J., 2004. "Regulation of transmission expansion in Argentina Part II: Developments since the Fourth Line," Cambridge Working Papers in Economics 0465, Faculty of Economics, University of Cambridge. [Downloadable!]
  21. Brunekreeft, G., 2003. "Market-based Investment in Electricity Transmission Networks: Controllable Flow," Cambridge Working Papers in Economics 0340, Faculty of Economics, University of Cambridge. [Downloadable!]
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