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A Nash Approach to Planning Merchant Transmission for Renewable Resource Integration

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  • Zhou, Qun
  • Tesfatsion, Leigh
  • Liu, Chen-Ching
  • Chu, Ron F.
  • Sun, Wei

Abstract

Major transmission projects are needed to integrate and to deliver renewable energy (RE) resources. Cost recovery is a serious impediment to transmission investment. A negotiation methodology is developed in this study to guide transmission investment for RE integration. Built on Nash bargaining theory, the methodology models a negotiation between an RE generation company and a transmission company for the cost sharing and recovery of a new transmission line permitting delivery of RE to the grid. Findings from a six-bus test case demonstrate the Pareto efficiency of the approach as well as its fairness, in that it is consistent with one commonly used definition of fairness in cooperative games, the Nash cooperative solution. Hence, the approach could potentially be used as a guideline for RE investors. The study also discusses the possibility of using RE subsidies to steer the negotiated solution towards a system-optimal transmission plan that maximizes total net benefits for all market participants. The findings suggest that RE subsidies can be effectively used to achieve system optimality when RE prices are fixed through bilateral contracts but have limited ability to achieve system optimality when RE prices are determined through locational marginal pricing. This limitation needs to be recognized in the design of RE subsidies.

Suggested Citation

  • Zhou, Qun & Tesfatsion, Leigh & Liu, Chen-Ching & Chu, Ron F. & Sun, Wei, 2013. "A Nash Approach to Planning Merchant Transmission for Renewable Resource Integration," ISU General Staff Papers 201301010800001469, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genstf:201301010800001469
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    References listed on IDEAS

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    1. Nash, John, 1953. "Two-Person Cooperative Games," Econometrica, Econometric Society, vol. 21(1), pages 128-140, April.
    2. Paul Joskow & Jean Tirole, 2005. "Merchant Transmission Investment," Journal of Industrial Economics, Wiley Blackwell, vol. 53(2), pages 233-264, June.
    3. Yu, Nanpeng & Tesfatsion, Leigh & Liu, Chen-Ching, 2012. "Financial Bilateral Contract Negotiation in Wholesale Electricity Markets Using Nash Bargaining Theory," ISU General Staff Papers 201201010800001470, Iowa State University, Department of Economics.
    4. Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, vol. 18(2), pages 155-162, April.
    5. Berendt, Christopher B., 2006. "A State-Based Approach to Building a Liquid National Market for Renewable Energy Certificates: The REC-EX Model," The Electricity Journal, Elsevier, vol. 19(5), pages 54-68, June.
    6. Enzo Sauma & Shmuel Oren, 2006. "Proactive planning and valuation of transmission investments in restructured electricity markets," Journal of Regulatory Economics, Springer, vol. 30(3), pages 358-387, November.
    7. Gately, Dermot, 1974. "Sharing the Gains from Regional Cooperation: A Game Theoretic Application to Planning Investment in Electric Power," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 15(1), pages 195-208, February.
    8. Tesfatsion, Leigh S., 1984. "Games, Goals, and Bounded Rationality," Staff General Research Papers Archive 11209, Iowa State University, Department of Economics.
    9. Binmore, Ken, 2007. "Playing for Real: A Text on Game Theory," OUP Catalogue, Oxford University Press, number 9780195300574.
    10. Enzo Sauma & Shmuel Oren, 2006. "Proactive planning and valuation of transmission investments in restructured electricity markets," Journal of Regulatory Economics, Springer, vol. 30(3), pages 261-290, November.
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    Cited by:

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    More about this item

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • Q2 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy

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