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Optimal regulation under unknown supply of distributed generation

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  • Rob Aalbers

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  • Viktoria Kocsis

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  • Victoria Shestalova

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Abstract

As distributed generation (DG) continues to expand, larger low-voltage networks will be required in the future. However, regulated distribution network operators (DNOs) need to invest in new infrastructure without knowing a relevant determinant of network costs, the future amount of DG. Due to uncertainty, optimal network capacity needs to reflect the expected demand for capacity over all possible DG states. Therefore, not all capacity will be used if a low level of DG occurs. Optimal regulation that is set under asymmetric information about future DG needs to create incentives for the DNO to invest in this 'excess capacity' and also encourage optimal network utilization. In this case, an option menu that includes fixed fees and positive network charges on DG-producers fulfills these requirements and implements the first-best optimum. On the contrary, price-cap and revenue-cap regulation lead to either underinvestment or high information rents to the DNO.

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Bibliographic Info

Paper provided by CPB Netherlands Bureau for Economic Policy Analysis in its series CPB Discussion Paper with number 192.

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Date of creation: Nov 2011
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Handle: RePEc:cpb:discus:192

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  1. Crew, Michael A & Fernando, Chitru S & Kleindorfer, Paul R, 1995. "The Theory of Peak-Load Pricing: A Survey," Journal of Regulatory Economics, Springer, vol. 8(3), pages 215-48, November.
  2. Ingo Vogelsang, 2005. "Electricity Transmission Pricing and Performance-Based Regulation," CESifo Working Paper Series 1474, CESifo Group Munich.
  3. Niesten, Eva, 2010. "Network investments and the integration of distributed generation: Regulatory recommendations for the Dutch electricity industry," Energy Policy, Elsevier, vol. 38(8), pages 4355-4362, August.
  4. Joskow Paul L., 2008. "Incentive Regulation and Its Application to Electricity Networks," Review of Network Economics, De Gruyter, vol. 7(4), pages 1-14, December.
  5. Ian M. Dobbs, 2004. "Intertemporal price cap regulation under uncertainty," Economic Journal, Royal Economic Society, vol. 114(495), pages 421-440, 04.
  6. Armstrong, Mark & Vickers, John, 2000. "Multiproduct Price Regulation under Asymmetric Information," Journal of Industrial Economics, Wiley Blackwell, vol. 48(2), pages 137-60, June.
  7. Jamasb, T. & Marantes, C., 2011. "Electricity Distribution Networks: Investment and Regulation, and Uncertain Demand," Cambridge Working Papers in Economics 1115, Faculty of Economics, University of Cambridge.
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Cited by:
  1. Arie ten Cate, 2012. "The socially optimal energy transition in a residential neighbourhood in the Netherlands," CPB Discussion Paper 222, CPB Netherlands Bureau for Economic Policy Analysis.

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