Long-Run Cost Functions for Electricity Transmission
AbstractElectricity transmission has become the pivotal industry segment for electricity restructuring. Yet, little is known about the shape of transmission cost functions. Reasons for this can be a lack of consensus about the definition of transmission output and the complexitity of the relationship between optimal grid expansion and output expansion. Knowledge of transmission cost functions could help firms (Transcos) and regulators plan transmission expansion and could help design regulatory incentive mechanisms. We explore transmission cost functions when the transmission output is defined as point-to-point transactions or financial transmission right (FTR) obligations and particularly explore expansion under loop-flows. We test the behavior of FTR-based cost functions for distinct network topologies and find evidence that cost functions defined as FTR outputs are piecewise differentiable and that they contain sections with negative marginal costs. Simulations, however, illustrate that such unusual properties do not stand in the way of applying price-cap incentive mechanisms to real-world transmission expansion.
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Bibliographic InfoPaper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 1020.
Length: 27 p.
Date of creation: 2010
Date of revision:
Publication status: Published in: The Energy Journal 33 (2012), 1
Electricity transmission; cost function; incentive regulation; merchant investment; congestion management;
Other versions of this item:
- Juan Rosellón, Ingo Vogelsang, and Hannes Weigt, 2012. "Long-run Cost Functions for Electricity Transmission," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1).
- Juan Rosellon & Ingo Vogelsang & Hannes Weigt, 2009. "Long-run Cost Functions for Electricity Transmission," Documentos de Trabajo DTE 465, CIDE, Division de Economia.
- Rosellón, Juan & Vogelsang, Ingo & Weigt, Hannes, 2009. "Long-run Cost Functions for Electricity Transmission," MPRA Paper 22842, University Library of Munich, Germany.
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
- L91 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Transportation: General
- L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
- Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
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