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Transmission constraints and strategic underinvestment in electric power generation

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  • Léautier, Thomas-Olivier
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    Abstract

    This article is the first to examine electric power producers' investment decisions when competition is imperfect and the transmission grid congested. This analysis yields numerous original insights. First, congestion on the grid is transient, and may disappear when demand is highest. Second, transmission capacity increases have complex impacts on generation: they may increase, decrease, or have no impact on the marginal value of generation, and may have similar or opposite impacts on the marginal value of different technologies. Third, the true social value of transmission, including its impact on investment, may be significantly lower than is commonly assumed.

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    File URL: http://idei.fr/doc/wp/2014/wp_idei_816.pdf
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    Bibliographic Info

    Paper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 816.

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    Date of creation: 06 Jan 2014
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    Handle: RePEc:ide:wpaper:27856

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    Keywords: electric power markets; imperfect competition; investment; transmission constraints;

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    1. Joskow, P. & Tirole, J., 2004. "Reliability and Competitive Electricity Markets," Cambridge Working Papers in Economics 0450, Faculty of Economics, University of Cambridge.
    2. Michael A. Crew & Paul R. Kleindorfer, 1976. "Peak Load Pricing with a Diverse Technology," Bell Journal of Economics, The RAND Corporation, vol. 7(1), pages 207-231, Spring.
    3. Paul L. Joskow, 2008. "Lessons Learned from Electricity Market Liberalization," The Energy Journal, International Association for Energy Economics, vol. 0(Special I), pages 9-42.
    4. Severin Borenstein & James. Bushnell & Steven Stoft, 2000. "The Competitive Effects of Transmission Capacity in A Deregulated Electricity Industry," RAND Journal of Economics, The RAND Corporation, vol. 31(2), pages 294-325, Summer.
    5. Ruderer, D., 2012. "The Impact of Transmission Pricing in Network Industries," Cambridge Working Papers in Economics 1230, Faculty of Economics, University of Cambridge.
    6. Leautier, Thomas-Olivier, 2001. "Transmission Constraints and Imperfect Markets for Power," Journal of Regulatory Economics, Springer, vol. 19(1), pages 27-54, January.
    7. Lijesen, Mark G., 2007. "The real-time price elasticity of electricity," Energy Economics, Elsevier, vol. 29(2), pages 249-258, March.
    8. Bert Willems, 2002. "Modeling Cournot Competition in an Electricity Market with Transmission Constraints," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 95-125.
    9. Cardell, Judith B. & Hitt, Carrie Cullen & Hogan, William W., 1997. "Market power and strategic interaction in electricity networks," Resource and Energy Economics, Elsevier, vol. 19(1-2), pages 109-137, March.
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