Do generation firms in restructured electricity markets have incentives to support social-welfare-improving transmission investments?
This paper examines the incentives that generation firms have in restructured electricity markets for supporting long-term transmission investments. In particular, we study whether generation firms, which arguably play a dominant role in the restructured electricity markets, have the incentives to fund or support incremental social-welfare-improving transmission investments. We examine this question in a two-node network and explore how such incentives are affected by the ownership of financial transmission rights (FTRs) by generation firms. In the analyzed two-node network, we show both (i) that the net exporter generation firm has the correct incentives to increase the transmission capacity incrementally up to a certain level and (ii) that, although a policy that allocates FTRs to the net exporter generation firm can be desirable from a social point of view, such a policy would dilute the net-importer-generation-firm's incentives to support transmission expansion. Moreover, if all FTRs were allocated or auctioned off to the net exporter generation firm, then it is possible to increase both consumer surplus and social welfare while keeping the net exporter generation firm revenue neutral.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Severin Borenstein & James. Bushnell & Steven Stoft, 2000.
"The Competitive Effects of Transmission Capacity in A Deregulated Electricity Industry,"
RAND Journal of Economics,
The RAND Corporation, vol. 31(2), pages 294-325, Summer.
- Severin Borenstein & James Bushnell & Steven Stoft, 1997. "The Competitive Effects of Transmission Capacity in a Deregulated Electricity Industry," NBER Working Papers 6293, National Bureau of Economic Research, Inc.
- Berenstein, Severin & Bushnell, James & Stoft, Steven, 2000. "The Competitive Effects of Transmission Capacity in a Deregulated Electricity Industry," Staff General Research Papers 13145, Iowa State University, Department of Economics.
- Paul Joskow & Jean Tirole, 2003.
"Merchant Transmission Investment,"
NBER Working Papers
9534, National Bureau of Economic Research, Inc.
- Joskow, Paul & Tirole, Jean, 2004. "Merchant Transmission Investment," IDEI Working Papers 263, Institut d'Économie Industrielle (IDEI), Toulouse.
- Paul Joskow & Jean Tirole, 2003. "Merchant Transmission Investment," Working Papers 0304, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
- Joskow, P. & Tirole, J., 2003. "Merchant Transmission Investment," Cambridge Working Papers in Economics 0324, Faculty of Economics, University of Cambridge.
- 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.
- Shmuel S. Oren, 1997. "Economic Inefficiency of Passive Transmission Rights in Congested Electricity Systems with Competitive Generation," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 63-83.
- 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.
- Steven Stoft, 1999. "Financial Transmission Rights Meet Cournot: How TCCs Curb Market Power," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 1-23.
- 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.
- 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.
- Hogan, William W, 1992. "Contract Networks for Electric Power Transmission," Journal of Regulatory Economics, Springer, vol. 4(3), pages 211-42, September.
- Barmack, Matthew & Griffes, Peter & Kahn, Edward & Oren, Shmuel, 2003. "Performance Incentives for Transmission," The Electricity Journal, Elsevier, vol. 16(3), pages 9-22, April.
When requesting a correction, please mention this item's handle: RePEc:eee:eneeco:v:31:y:2009:i:5:p:676-689. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.