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Long-run Cost Functions for Electricity Transmission

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  • Rosellón, Juan
  • Vogelsang, Ingo
  • Weigt, Hannes

Abstract

Electricity transmission has become the pivotal industry segment for electricity restructuring. Yet, little is known about the shape of transmission cost functions. Reasons for this can be a lack of consensus about the definition of transmission output and the complexitity of the relationship between optimal grid expansion and output expansion. Knowledge of transmission cost functions could help firms (Transcos) and regulators plan transmission expansion and could help design regulatory incentive mechanisms. We explore transmission cost functions when the transmission output is defined as point-to-point transactions or financial transmission right (FTR) obligations and particularly explore expansion under loop-flows. We test the behavior of FTR-based cost functions for distinct network topologies and find evidence that cost functions defined as FTR outputs are piecewise differentiable and that they contain sections with negative marginal costs. Simulations, however, illustrate that such unusual properties do not stand in the way of applying price-cap incentive mechanisms to real-world transmission expansion.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 22842.

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Date of creation: 11 Nov 2009
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Handle: RePEc:pra:mprapa:22842

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Keywords: Electricity transmission; cost function; incentive regulation; merchant investment; congestion management;

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References

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  1. Vogelsang, Ingo, 2001. "Price Regulation for Independent Transmission Companies," Journal of Regulatory Economics, Springer, Springer, vol. 20(2), pages 141-65, September.
  2. Juan Rosellon & Hannes Weigt, 2007. "A Combined Merchant-Regulatory Mechanism for Electricity Transmission Expansion in Europe," Working papers, CIDE, División de Economía DTE 396, CIDE, División de Economía.
  3. Bushnell, James B. & Stoft, Steven E., 1997. "Improving private incentives for electric grid investment," Resource and Energy Economics, Elsevier, Elsevier, vol. 19(1-2), pages 85-108, March.
  4. Bushnell, James B & Stoft, Steven E, 1996. "Electric Grid Investment under a Contract Network Regime," Journal of Regulatory Economics, Springer, Springer, vol. 10(1), pages 61-79, July.
  5. 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.
  6. Chao, Hung-Po & Peck, Stephen, 1996. "A Market Mechanism for Electric Power Transmission," Journal of Regulatory Economics, Springer, Springer, vol. 10(1), pages 25-59, July.
  7. Hogan, William W, 1992. "Contract Networks for Electric Power Transmission," Journal of Regulatory Economics, Springer, Springer, vol. 4(3), pages 211-42, September.
  8. Ingo Vogelsang, 2005. "Electricity Transmission Pricing and Performance-Based Regulation," CESifo Working Paper Series 1474, CESifo Group Munich.
  9. Oren, Shmuel S. & Spiller, Pablo T. & Varaiya, Pravin & Wu, Felix, 1995. "Nodal prices and transmission rights: A critical appraisal," The Electricity Journal, Elsevier, Elsevier, vol. 8(3), pages 24-35, April.
  10. Wu, Felix, et al, 1996. "Folk Theorems on Transmission Access: Proofs and Counterexamples," Journal of Regulatory Economics, Springer, Springer, vol. 10(1), pages 5-23, July.
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Cited by:
  1. Juan Rosellon & Jonas Egerer & Wolf-Peter Schill, 2013. "Power System Transformation towards Renewables: An Evaluation of Regulatory Approaches for Network Expansion," Working papers, CIDE, División de Economía DTE 562, CIDE, División de Economía.
  2. Luis Ángel Herrera & Juan Rosellón, 2013. "On Distributive Effects of Optimal Regulation for Power Grid Expansion," Discussion Papers of DIW Berlin 1327, DIW Berlin, German Institute for Economic Research.
  3. Hagspiel, Simeon & Jägemann, Cosima & Lindenberger, Dietmar & Brown, Tom & Cherevatskiy, Stanislav & Tröster, Eckehard, 2013. "Cost-Optimal Power System Extension under Flow-Based Market Coupling," EWI Working Papers, Energiewirtschaftliches Institut an der Universitaet zu Koeln 2013-9, Energiewirtschaftliches Institut an der Universitaet zu Koeln.

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