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Long-run Cost Functions for Electricity Transmission

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Listed author(s):
  • Juan Rosellón, Ingo Vogelsang, and Hannes Weigt

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 piece-wise 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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Article provided by International Association for Energy Economics in its journal The Energy Journal.

Volume (Year): Volume 33 (2012)
Issue (Month): Number 1 ()
Pages:

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Handle: RePEc:aen:journl:33-1-a05
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  • F0 - International Economics - - General

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  1. Paul Joskow & Jean Tirole, 2005. "Merchant Transmission Investment," Journal of Industrial Economics, Wiley Blackwell, vol. 53(2), pages 233-264, 06.
  2. Bushnell, James B & Stoft, Steven E, 1996. "Electric Grid Investment under a Contract Network Regime," Journal of Regulatory Economics, Springer, vol. 10(1), pages 61-79, July.
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  5. Thomas-Olivier Leautier, 2000. "Regulation of an Electric Power Transmission Company," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 61-92.
  6. Ingo Vogelsang, 2006. "Electricity Transmission Pricing and Performance-based Regulation," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 97-126.
  7. Bushnell, James B. & Stoft, Steven E., 1997. "Improving private incentives for electric grid investment," Resource and Energy Economics, Elsevier, vol. 19(1-2), pages 85-108, March.
  8. Wu, Felix & Varaiya, Pravin & Spiller, Pablo & Oren, Shmuel, 1996. "Folk Theorems on Transmission Access: Proofs and Counterexamples," Journal of Regulatory Economics, Springer, vol. 10(1), pages 5-23, July.
  9. Laffont, Jean-Jacques & Tirole, Jean, 1996. "Creating Competition through Interconnection: Theory and Practice," Journal of Regulatory Economics, Springer, vol. 10(3), pages 227-256, November.
  10. Juan Rosellon & Hannes Weigt, 2007. "A Combined Merchant-Regulatory Mechanism for Electricity Transmission Expansion in Europe," Working papers DTE 396, CIDE, División de Economía.
  11. Makoto Tanaka, 2007. "Extended Price Cap Mechanism for Efficient Transmission Expansion under Nodal Pricing," Networks and Spatial Economics, Springer, vol. 7(3), pages 257-275, September.
  12. Chao, Hung-Po & Peck, Stephen, 1996. "A Market Mechanism for Electric Power Transmission," Journal of Regulatory Economics, Springer, vol. 10(1), pages 25-59, July.
  13. Vogelsang, Ingo, 2001. "Price Regulation for Independent Transmission Companies," Journal of Regulatory Economics, Springer, vol. 20(2), pages 141-165, September.
  14. Hogan, William W, 1992. "Contract Networks for Electric Power Transmission," Journal of Regulatory Economics, Springer, vol. 4(3), pages 211-242, September.
  15. Baldick, Ross & Kahn, Edward, 1993. "Network Costs and the Regulation of Wholesale Competition in Electric Power," Journal of Regulatory Economics, Springer, vol. 5(4), pages 367-384, December.
  16. Bresesti, Paola & Calisti, Roberto & Cazzol, Maria Vittoria & Gatti, Antonio & Provenzano, Dario & Vaiani, Andrea & Vailati, Riccardo, 2009. "The benefits of transmission expansions in the competitive electricity markets," Energy, Elsevier, vol. 34(3), pages 274-280.
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Cited by:

  1. Ruiz, Erix & Rosellón, Juan, 2012. "Transmission investment in the Peruvian electricity market: Theory and applications," Energy Policy, Elsevier, vol. 47(C), pages 238-245.
  2. Herrera, Luis Ángel & Rosellón, Juan, 2014. "On distributive effects of optimal regulation for power grid expansion," Energy Policy, Elsevier, vol. 69(C), pages 189-204.
  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 2013-9, Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI).
  4. Schill, Wolf-Peter & Egerer, Jonas & Rosellón, Juan, 2015. "Testing Regulatory Regimes for Power Transmission Expansion with Fluctuating Demand and Wind Generation," EconStor Open Access Articles, ZBW - German National Library of Economics, pages 1-28.
  5. Anne Neumann & Juan Rosellón & Hannes Weigt, 2015. "Removing Cross-Border Capacity Bottlenecks in the European Natural Gas Market—A Proposed Merchant-Regulatory Mechanism," Networks and Spatial Economics, Springer, vol. 15(1), pages 149-181, March.
  6. Egerer, Jonas & Rosellón, Juan & Schill, Wolf-Peter, 2015. "Power System Transformation toward Renewables : An Evaluation of Regulatory Approaches for Network Expansion," EconStor Open Access Articles, ZBW - German National Library of Economics, pages 105-128.
  7. N. Gülpınar & F. Oliveira, 2014. "Analysis of relationship between forward and spot markets in oligopolies under demand and cost uncertainties," Computational Management Science, Springer, vol. 11(3), pages 267-283, July.

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