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

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

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.

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Article provided by Elsevier in its journal Utilities Policy.

Volume (Year): 19 (2011)
Issue (Month): 1 (January)
Pages: 3-13

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Handle: RePEc:eee:juipol:v:19:y:2011:i:1:p:3-13
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30478

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  1. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680, March.
  2. Vogelsang, Ingo, 2001. "Price Regulation for Independent Transmission Companies," Journal of Regulatory Economics, Springer, vol. 20(2), pages 141-65, September.
  3. William Hogan & Juan Rosellón & Ingo Vogelsang, 2010. "Toward a combined merchant-regulatory mechanism for electricity transmission expansion," Journal of Regulatory Economics, Springer, vol. 38(2), pages 113-143, October.
  4. Juan Rosell�n & 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.
  5. Tarjei Kristiansen & Juan Rosellón, 2006. "A Merchant Mechanism for Electricity Transmission Expansion," Journal of Regulatory Economics, Springer, vol. 29(2), pages 167-193, 03.
  6. Joskow, Paul L., 2005. "Transmission policy in the United States," Utilities Policy, Elsevier, vol. 13(2), pages 95-115, June.
  7. 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.
  8. Robert Wilson, 2002. "Architecture of Power Markets," Econometrica, Econometric Society, vol. 70(4), pages 1299-1340, July.
  9. Crew, Michael A & Fernando, Chitru S & Kleindorfer, Paul R, 1995. "The Theory of Peak-Load Pricing: A Survey," Journal of Regulatory Economics, Springer, vol. 8(3), pages 215-48, November.
  10. Hogan, William W, 1992. "Contract Networks for Electric Power Transmission," Journal of Regulatory Economics, Springer, vol. 4(3), pages 211-42, September.
  11. 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, June.
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