Fred Schweppe meets Marcel Boiteux and Antoine-Augustin Cournot: transmission constraints and strategic underinvestment in electric power generation
AbstractThis article examines imperfectly competitive investment in electric power generation in the presence of congestion on the transmission grid. Under simple yet realistic assumptions, it precisely derives the technology mix as a function of the capacity of the transmission interconnection. In particular, it nds that, if the interconnection is congested in one direction only, the cumulative capacity is not a¤ected by the congestion, while the baseload capacity is simply the uncongested baseload capacity, weighted by the size of its domestic market, plus the interconnection capacity. If the interconnection is successively congested in both directions, the peaking capacity is the cumulative uncongested capacity, weighted by the size its domestic market, plus the capacity of the interconnection, while the baseload capacity is the solution of a simple rst-order condition. The marginal value of interconnection capacity is shown to generalize the expression obtained under perfect competition. It includes both a short-term component, that captures the reduction in marginal cost from substituting cheaper for more expensive power, but also a long-term component, that captures the change in installed capacity. Finally, increasing interconnection is shown to have an ambiguous impact on producerspro ts. For example, if the interconnection is congested in one direction only, increasing capacity increases a monopolist pro t. On the other hand, if the line is almost not congested, it reduces oligopolistspro ts.
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Bibliographic InfoPaper provided by Toulouse School of Economics (TSE) in its series TSE Working Papers with number 13-432.
Date of creation: 19 Sep 2013
Date of revision:
Find related papers by JEL classification:
- D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
- L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-10-25 (All new papers)
- NEP-ENE-2013-10-25 (Energy Economics)
- NEP-REG-2013-10-25 (Regulation)
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