Merchant Transmission Investment
AbstractWe examine the performance attributes of a merchant transmission investment framework that relies on âmarket drivenâ transmission investment to provide the infrastructure to support competitive wholesale markets for electricity. Under a stringent set of assumptions, the merchant investment model has a remarkable set of attributes that appear to solve the natural monopoly problem and the associated need for regulating transmission companies traditionally associated with electric transmission networks. We expand the merchant model upon which these conclusions are based to incorporate imperfections in wholesale electricity markets, lumpiness in transmission investment opportunities, stochastic attributes of transmission networks and associated property rights definition issues, the effects of the behavior of system operators and transmission owners on transmission capacity and reliability, coordination and bargaining considerations, forward contract, commitment and asset specificity issues. Incorporating these more realistic attributes of transmission networks and the behavior of transmission owners and system operators significantly undermines the attractive properties of the merchant investment model. Relying primarily on a market driven investment framework to govern investment in electric transmission networks is likely to lead to inefficient investment decisions and undermine the performance of competitive markets for electricity. A significant research challenge is to design regulatory mechanisms for system operators and incumbent transmission owners and a better framework for defining transmission property rights that will stimulate efficient investments by regulated incumbent transmission owners and by merchant entrants responding to market opportunities when they are the most efficient suppliers.
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Bibliographic InfoPaper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 263.
Date of creation: 2004
Date of revision:
Publication status: Published in The Journal of Industrial Economics, vol.�53, n°2, juin 2005, p.�233-264.
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Other versions of this item:
- Paul Joskow & Jean Tirole, 2003. "Merchant Transmission Investment," Working Papers 0304, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
- Joskow, P. & Tirole, J., 2003. "Merchant Transmission Investment," Cambridge Working Papers in Economics 0324, Faculty of Economics, University of Cambridge.
- Paul Joskow & Jean Tirole, 2003. "Merchant Transmission Investment," NBER Working Papers 9534, National Bureau of Economic Research, Inc.
- Joskow, Paul L. & Tirole, Jean, 2005. "Merchant Transmission Investment," Open Access publications from University of Toulouse 1 Capitole http://neeo.univ-tlse1.fr, University of Toulouse 1 Capitole.
- L9 - Industrial Organization - - Industry Studies: Transportation and Utilities
- L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
- L5 - Industrial Organization - - Regulation and Industrial Policy
- D4 - Microeconomics - - Market Structure and Pricing
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