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Incentives for transmission investment in the PJM electricity market: FTRs or regulation (or both?)

Author

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  • Rosellón, Juan
  • Myslíková, Zdenka
  • Zenón, Eric

Abstract

This paper presents an application of a mechanism that provides incentives to promote transmission network expansion in the area of the US electric system known as PJM. The applied mechanism combines the merchant and regulatory approaches to attract investment into transmission grids. It is based on rebalancing a two-part tariff in the framework of a wholesale electricity market with locational pricing. The expansion of the network is carried out through the sale of financial transmission rights for the congested lines. The mechanism is tested for 14-node and 17-node geographical coverage areas of PJM. Under Laspeyres weights, it is shown that prices converge to the marginal cost of generation, the congestion rent decreases, and the total social welfare increases. The mechanism is shown to adjust prices effectively given either non-peak or peak demand.

Suggested Citation

  • Rosellón, Juan & Myslíková, Zdenka & Zenón, Eric, 2011. "Incentives for transmission investment in the PJM electricity market: FTRs or regulation (or both?)," Utilities Policy, Elsevier, vol. 19(1), pages 3-13, January.
  • Handle: RePEc:eee:juipol:v:19:y:2011:i:1:p:3-13
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    References listed on IDEAS

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    1. William Hogan & Juan Rosellón & Ingo Vogelsang, 2010. "Toward a combined merchant-regulatory mechanism for electricity transmission expansion," Journal of Regulatory Economics, Springer, pages 113-143.
    2. Juan Rosellón & Hannes Weigt, 2011. "A Dynamic Incentive Mechanism for Transmission Expansion in Electricity Networks: Theory, Modeling, and Application," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 119-148.
    3. 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.
    4. Robert Wilson, 2002. "Architecture of Power Markets," Econometrica, Econometric Society, vol. 70(4), pages 1299-1340, July.
    5. Joskow, Paul L., 2005. "Transmission policy in the United States," Utilities Policy, Elsevier, pages 95-115.
    6. Vogelsang, Ingo, 2001. "Price Regulation for Independent Transmission Companies," Journal of Regulatory Economics, Springer, pages 141-165.
    7. Hogan, William W, 1992. "Contract Networks for Electric Power Transmission," Journal of Regulatory Economics, Springer, pages 211-242.
    8. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680.
    9. Mark Armstrong & Simon Cowan & John Vickers, 1994. "Regulatory Reform: Economic Analysis and British Experience," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262510790, January.
    10. Tarjei Kristiansen & Juan Rosellón, 2006. "A Merchant Mechanism for Electricity Transmission Expansion," Journal of Regulatory Economics, Springer, pages 167-193.
    11. Crew, Michael A & Fernando, Chitru S & Kleindorfer, Paul R, 1995. "The Theory of Peak-Load Pricing: A Survey," Journal of Regulatory Economics, Springer, pages 215-248.
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    Citations

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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. 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.
    3. 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.
    4. Ibarra-Yunez, Alejandro, 2015. "Energy reform in Mexico: Imperfect unbundling in the electricity sector," Utilities Policy, Elsevier, pages 19-27.

    More about this item

    Keywords

    Electricity transmission expansion Incentive regulation PJM;

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L91 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Transportation: General
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General

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