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A Combined Merchant-Regulatory Mechanism for Electricity Transmission Expansion in Europe

Author

Listed:
  • Juan Rosellon

    (Division of Economics, CIDE)

  • Hannes Weigt

Abstract

This paper provides a new mechanism on how to overcome transmission expansion in the specific European context. We test the Hogan-Rosellón-Vogelsang (2007) (HRV) incentive mechanism for different network topologies. The HRV mechanism is based on redefining the output of transmission in terms of point-to-point transactions or financial transmission rights (FTRs), and applies the incentive-regulation logic in Vogelsang (2001) that proposed rebalancing the variable and fixed parts of a two-part tariff to promote the efficient long-term expansion of the grid. We analyze three main topics: first, the behavior of cost functions is analyzed for distinct network topologies; second, the HRV regulatory approach is incorporated in a MPEC Problem and tested for a three node network, and, finally, we apply the mechanism to a simplified network in Northwestern Europe. The results suggest that the mechanism is generally suited as an incentive tool for network extensions.

Suggested Citation

  • Juan Rosellon & Hannes Weigt, 2007. "A Combined Merchant-Regulatory Mechanism for Electricity Transmission Expansion in Europe," Working papers DTE 396, CIDE, División de Economía.
    • Handle: RePEc:emc:wpaper:dte396
    as

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    File URL: http://www.economiamexicana.cide.edu/RePEc/emc/pdf/DTE/DTE396.pdf
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    References listed on IDEAS

    as
    1. Bushnell, James B. & Stoft, Steven E., 1997. "Improving private incentives for electric grid investment," Resource and Energy Economics, Elsevier, vol. 19(1-2), pages 85-108, March.
    2. Paul Joskow & Jean Tirole, 2005. "Merchant Transmission Investment," Journal of Industrial Economics, Wiley Blackwell, vol. 53(2), pages 233-264, June.
    3. Neuhoff, Karsten & Barquin, Julian & Boots, Maroeska G. & Ehrenmann, Andreas & Hobbs, Benjamin F. & Rijkers, Fieke A.M. & Vazquez, Miguel, 2005. "Network-constrained Cournot models of liberalized electricity markets: the devil is in the details," Energy Economics, Elsevier, vol. 27(3), pages 495-525, May.
    4. Thomas-Olivier Leautier, 2000. "Regulation of an Electric Power Transmission Company," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 61-92.
    5. Laffont, Jean-Jacques & Tirole, Jean, 1996. "Creating Competition through Interconnection: Theory and Practice," Journal of Regulatory Economics, Springer, vol. 10(3), pages 227-256, November.
    6. Vogelsang, Ingo, 2001. "Price Regulation for Independent Transmission Companies," Journal of Regulatory Economics, Springer, vol. 20(2), pages 141-165, September.
    7. Tarjei Kristiansen & Juan Rosellón, 2006. "A Merchant Mechanism for Electricity Transmission Expansion," Journal of Regulatory Economics, Springer, vol. 29(2), pages 167-193, March.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. 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).
    2. Rosellon, Juan & Tregear, Juan & Zenon, Eric, 2010. "El modelo HRV para expansión óptima de redes de transmisión: una aplicación a la red eléctrica de Ontario [The HRV Model for the Optimal Expansion of Transmission Networks: an Application to the On," MPRA Paper 26471, University Library of Munich, Germany.

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    More about this item

    Keywords

    Combined Merchant-Regulatory Mechanism; Electricity Transmission Expansion; Europe;
    All these keywords.

    JEL classification:

    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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