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Incentives for Transmission Investment in the PJM Electricity Market: FTRs or Regulation (or Both?)

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  • Juan Rosellón
  • Zdenka Mysliková
  • Eric Zenón

Abstract

This paper presents an application of a mechanism that provides incentives to promote transmission network expansion in the area of the US electric system known as PJM. The applied mechanism combines the merchant and regulatory approaches to attract investment into transmission grids. It is based on rebalancing a two-part tariff in the framework of a wholesale electricity market with locational pricing. The expansion of the network is carried out through the sale of financial transmission rights for the congested lines. The mechanism is tested for 14-node and 17-node geographical coverage areas of PJM. Under Laspeyres weights, it is shown that prices converge to the marginal cost of generation, the congestion rent decreases, and the total social welfare increases. The mechanism is shown to adjust prices effectively given either non-peak or peak demand.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.358036.de/dp1026.pdf
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Bibliographic Info

Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 1026.

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Length: 27 p.
Date of creation: 2010
Date of revision:
Handle: RePEc:diw:diwwpp:dp1026

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Keywords: Electricity transmission expansion; incentive regulation; PJM;

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References

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  1. Tarjei Kristiansen & Juan Rosellón, 2006. "A Merchant Mechanism for Electricity Transmission Expansion," Journal of Regulatory Economics, Springer, vol. 29(2), pages 167-193, 03.
  2. Rosellon, Juan & Weigt, Hannes, 2008. "A Dynamic Incentive Mechanism for Transmission Expansion in Electricity Networks – Theory, Modeling and Application," MPRA Paper 22843, University Library of Munich, Germany.
  3. 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.
  4. Vogelsang, Ingo, 2001. "Price Regulation for Independent Transmission Companies," Journal of Regulatory Economics, Springer, vol. 20(2), pages 141-65, September.
  5. Joskow, Paul L., 2004. "Transmission Policy In The United States," Working paper 110, Regulation2point0.
  6. William Hogan & Juan Rosellón & Ingo Vogelsang, 2010. "Toward a Combined Merchant-Regulatory Mechanism for Electricity Transmission Expansion," Discussion Papers of DIW Berlin 1025, DIW Berlin, German Institute for Economic Research.
  7. Robert Wilson, 2002. "Architecture of Power Markets," Econometrica, Econometric Society, vol. 70(4), pages 1299-1340, July.
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Cited by:
  1. Erix Ruiz & Juan Rosellón, 2011. "Transmission Investment in the Peruvian Electricity Market: Theory and Applications," Discussion Papers of DIW Berlin 1171, DIW Berlin, German Institute for Economic Research.
  2. Juan Rosellon & Luis Herrera, 2013. "On Distributive Effects of Optimal Regulation for Power Grid Expansion," Working papers DTE 563, CIDE, División de Economía.

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