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The Impact of Transmission Pricing in Network Industries

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  • Ruderer, D.
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    Abstract

    The allocation of scarce transmission resources has a considerable impact on investment incentives in network industries. We study the long term effects of two common network management regimes on investment in production and transmission facilities. In one case transmission constraints are directly taken into account through locationally differentiated market prices (simultaneous market clearing). In the other case, a uniform market price is implemented and transmission constraints are resolved in a subsequent congestion market (sequential market clearing). While simultaneous market clearing produces the efficient outcome, sequential market clearing leads to overinvestment in generation and transmission capacity, as we show. These findings contribute to the debate on electricity transmission pricing.

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    File URL: http://www.econ.cam.ac.uk/research/repec/cam/pdf/cwpe1230.pdf
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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 1230.

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    Date of creation: 07 Jun 2012
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    Handle: RePEc:cam:camdae:1230

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    Web page: http://www.econ.cam.ac.uk/index.htm

    Related research

    Keywords: Transmission Investment; Generation Investment; Market Design; Locational Marginal Pricing; Redispatch; Fluctuating Demand; Scarcity Rents;

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    1. Reynolds, Stanley S. & Wilson, Bart J., 2000. "Bertrand-Edgeworth Competition, Demand Uncertainty, and Asymmetric Outcomes," Journal of Economic Theory, Elsevier, vol. 92(1), pages 122-141, May.
    2. Karsten Neuhoff & Benjamin F. Hobbs & David Newbery, 2011. "Congestion Management in European Power Networks: Criteria to Assess the Available Options," Discussion Papers of DIW Berlin 1161, DIW Berlin, German Institute for Economic Research.
    3. Gabszewicz, J.J. & Poddar, S., . "Demand fluctuations and capacity utilization under duopoly," CORE Discussion Papers RP -1269, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    4. de Frutos, María-Ángeles & Fabra, Natalia, 2011. "Endogenous capacities and price competition: The role of demand uncertainty," International Journal of Industrial Organization, Elsevier, vol. 29(4), pages 399-411, July.
    5. Anette Boom, 2007. "Vertically Integrated Firms' Investments in Electricity Generating Capacities," CIE Discussion Papers 2007-14, University of Copenhagen. Department of Economics. Centre for Industrial Economics.
    6. Vincent Rious & Jean-Michel Glachant & Philippe Dessante, 2010. "Transmission Network Investment as an Anticipation Problem," RSCAS Working Papers 2010/04, European University Institute.
    7. Bushnell, James & Stoft, Steven, 1997. "Improving Private Incentives for Electric Grid Investment," Staff General Research Papers 31549, Iowa State University, Department of Economics.
    8. Sauma, Enzo E. & Oren, Shmuel S., 2009. "Do generation firms in restructured electricity markets have incentives to support social-welfare-improving transmission investments?," Energy Economics, Elsevier, vol. 31(5), pages 676-689, September.
    9. Natalia Fabra & Nils‐Henrik M von der Fehr & María‐Ángeles de Frutos, 2011. "Market Design and Investment Incentives," Economic Journal, Royal Economic Society, vol. 121(557), pages 1340-1360, December.
    10. Schaber, Katrin & Steinke, Florian & Hamacher, Thomas, 2012. "Transmission grid extensions for the integration of variable renewable energies in Europe: Who benefits where?," Energy Policy, Elsevier, vol. 43(C), pages 123-135.
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    Cited by:
    1. Léautier, Thomas-Olivier, 2014. "Transmission constraints and strategic underinvestment in electric power generation," TSE Working Papers 13-459, Toulouse School of Economics (TSE).
    2. Léautier, Thomas-Olivier, 2013. "Fred Schweppe meets Marcel Boiteux and Antoine-Augustin Cournot: transmission constraints and strategic underinvestment in electric power generation," IDEI Working Papers 796, Institut d'Économie Industrielle (IDEI), Toulouse.
    3. Léautier, Thomas-Olivier, 2013. "Fred Schweppe meets Marcel Boiteux and Antoine-Augustin Cournot: transmission constraints and strategic underinvestment in electric power generation," TSE Working Papers 13-432, Toulouse School of Economics (TSE).
    4. Léautier, Thomas-Olivier, 2014. "Transmission constraints and strategic underinvestment in electric power generation," IDEI Working Papers 816, Institut d'Économie Industrielle (IDEI), Toulouse.

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