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Power System Transformation towards Renewables: An Evaluation of Regulatory Approaches for Network Expansion

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  • Jonas Egerer
  • Juan Rosellón
  • Wolf-Peter Schill

Abstract

We analyze various regulatory regimes for electricity transmission investment in the context of a transformation of the power system towards renewable energy. We study distinctive developments of the generation mix with different implications on network congestion, assuming that a shift from conventional power plants towards renewables may go along with exogenous shocks on transmission requirements, which may be either of temporary or permanent nature. We specifically analyze the relative performance of a combined merchant-regulatory price-cap mechanism, a cost-based rule, and a non-regulated approach in dynamic generation settings. Through application in a stylized two-node network, we find that incentive regulation may perform satisfactorily only when appropriate weights are used. While quasi-ideal weights generally restore the beneficial properties that incentive regulatory mechanisms are well-known for in static settings, pure Laspeyres weights may either lead to overinvestment (stranded investments) or delayed investments as compared to the welfare optimum benchmark. Stranded investments could then be avoided through proper handling of weights. Model results indicate that using average Laspeyres-Paasche weights appears to be an appropriate strategy in the context of permanently or temporarily increasing network congestion. Our analysis motivates further research aimed to characterize optimal regulation for transmission expansion in the context of renewable integration.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.424931.de/dp1312.pdf
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Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 1312.

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Length: 27 p.
Date of creation: 2013
Date of revision:
Handle: RePEc:diw:diwwpp:dp1312

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Keywords: Electricity transmission; incentive regulation; renewable integration; Laspeyres/Paasche weights; ideal weights;

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  1. Loeb, Martin & Magat, Wesley A, 1979. "A Decentralized Method for Utility Regulation," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 22(2), pages 399-404, October.
  2. Newbery, D., 2004. "Electricity Liberalisation in Britain: the quest for a satisfactory wholesale market design," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 0469, Faculty of Economics, University of Cambridge.
  3. Laffont, Jean-Jacques & Tirole, Jean, 1996. "Creating Competition through Interconnection: Theory and Practice," Journal of Regulatory Economics, Springer, Springer, vol. 10(3), pages 227-56, November.
  4. 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.
  5. Bushnell, James & Stoft, Steven, 1997. "Improving Private Incentives for Electric Grid Investment," Staff General Research Papers 31549, Iowa State University, Department of Economics.
  6. Tarjei Kristiansen & Juan Rosellón, 2006. "A Merchant Mechanism for Electricity Transmission Expansion," Journal of Regulatory Economics, Springer, Springer, vol. 29(2), pages 167-193, 03.
  7. Juan Rosellón, Ingo Vogelsang, and Hannes Weigt, 2012. "Long-run Cost Functions for Electricity Transmission," The Energy Journal, International Association for Energy Economics, International Association for Energy Economics, vol. 0(Number 1).
  8. Makoto Tanaka, 2007. "Extended Price Cap Mechanism for Efficient Transmission Expansion under Nodal Pricing," Networks and Spatial Economics, Springer, Springer, vol. 7(3), pages 257-275, September.
  9. Mark Armstrong & Simon Cowan & John Vickers, 1994. "Regulatory Reform: Economic Analysis and British Experience," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262510790, December.
  10. 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.
  11. Vogelsang, Ingo, 2001. "Price Regulation for Independent Transmission Companies," Journal of Regulatory Economics, Springer, Springer, vol. 20(2), pages 141-65, September.
  12. Vogelsang, Ingo, 1988. "A Little Paradox in the Design of Regulatory Mechanisms," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(3), pages 467-76, August.
  13. Bertoletti, Paolo & Poletti, Clara, 1997. "Welfare effects of discriminatory two-part tariffs constrained by price caps," Economics Letters, Elsevier, Elsevier, vol. 56(3), pages 293-298, November.
  14. Michael Pollitt & Stephen Davies* & Catherine Waddams Price* & Justus Haucap & Machiel Mulder** & Victoria Shestalova & Gijsbert Zwart, 2007. "Vertical Unbundling in the EU Electricity Sector," Intereconomics: Review of European Economic Policy, Springer, Springer, vol. 42(6), pages 292-310, November.
  15. van der Weijde, Adriaan Hendrik & Hobbs, Benjamin F., 2012. "The economics of planning electricity transmission to accommodate renewables: Using two-stage optimisation to evaluate flexibility and the cost of disregarding uncertainty," Energy Economics, Elsevier, Elsevier, vol. 34(6), pages 2089-2101.
  16. Vogelsang, Ingo, 1989. "Two-part tariffs as regulatory constraints," Journal of Public Economics, Elsevier, Elsevier, vol. 39(1), pages 45-66, June.
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