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Fred Schweppe meets Marcel Boiteux and Antoine-Augustin Cournot: transmission constraints and strategic underinvestment in electric power generation

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  • Léautier, Thomas-Olivier
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    Abstract

    This 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 producers’pro 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 oligopolists’pro ts.

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    Bibliographic Info

    Paper provided by Toulouse School of Economics (TSE) in its series TSE Working Papers with number 13-432.

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    Date of creation: 19 Sep 2013
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    Handle: RePEc:tse:wpaper:27643

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    1. Severin Borenstein & Stephen Holland, 2005. "On the Efficiency of Competitive Electricity Markets with Time-Invariant Retail Prices," RAND Journal of Economics, The RAND Corporation, vol. 36(3), pages 469-493, Autumn.
    2. 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.
    3. Paul Joskow & Jean Tirole, 2007. "Reliability and competitive electricity markets," RAND Journal of Economics, RAND Corporation, vol. 38(1), pages 60-84, 03.
    4. Leautier, Thomas-Olivier, 2001. "Transmission Constraints and Imperfect Markets for Power," Journal of Regulatory Economics, Springer, vol. 19(1), pages 27-54, January.
    5. 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.
    6. Ruderer, D., 2012. "The Impact of Transmission Pricing in Network Industries," Cambridge Working Papers in Economics 1230, Faculty of Economics, University of Cambridge.
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