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Nodal pricing of electricity: how much does it cost to get it wrong?

  • Richard Green


Economists know how to calculate optimal prices for electricity transmission. These are rarely applied in practice. This paper develops a 13-node model of the transmission system in England and Wales, incorporating losses and transmission constraints. It is solved with optimal prices, and with uniform prices for demand and for generation, re-dispatching when needed to take account of transmission constraints. Moving from uniform prices to optimal nodal prices could raise welfare by 1.3% of the generators’ revenues, and would be less vulnerable to market power. It would also send better investment signals, but create politically sensitive regional gains and losses. Copyright Springer Science+Business Media, LLC 2007

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Article provided by Springer in its journal Journal of Regulatory Economics.

Volume (Year): 31 (2007)
Issue (Month): 2 (April)
Pages: 125-149

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Handle: RePEc:kap:regeco:v:31:y:2007:i:2:p:125-149
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  1. Green, Richard, 1997. "Electricity transmission pricing: an international comparison," Utilities Policy, Elsevier, vol. 6(3), pages 177-184, September.
  2. Ilic, Marija D. & Yoon, Yong T. & Zobian, Assef & Paravalos, Mary Ellen, 1997. "Toward regional transmission provision and its pricing in New England," Utilities Policy, Elsevier, vol. 6(3), pages 245-256, September.
  3. Ehrenmann, A. & Neuhoff, K., 2003. "A Comparison of Electricity Market Designs in Networks," Cambridge Working Papers in Economics 0341, Faculty of Economics, University of Cambridge.
  4. Joskow, Paul L & Tirole, Jean, 1999. "Transmission Rights and Market Power on Electric Power Networks I: Financial Rights," CEPR Discussion Papers 2093, C.E.P.R. Discussion Papers.
  5. Green, R., 2004. "Electricity Transmission Pricing: How much does it cost to get it wrong?," Cambridge Working Papers in Economics 0466, Faculty of Economics, University of Cambridge.
  6. Hsu, Michael, 1997. "An introduction to the pricing of electric power transmission," Utilities Policy, Elsevier, vol. 6(3), pages 257-270, September.
  7. Newbery, D.M. & Pollitt, M.G., 1996. "The Restructuring and Privatisation of the CEGB: Was It Worth It?," Cambridge Working Papers in Economics 9607, Faculty of Economics, University of Cambridge.
  8. Richard Gilbert & Neuhoff, K. & Newbery, D., 2002. "Allocating Transmission to Mitigate Market Power in Electricity Networks," Cambridge Working Papers in Economics 0225, Faculty of Economics, University of Cambridge.
  9. 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.
  10. Macatangay, Rafael Emmanuel A., 1998. "Space-time prices of wholesale electricity in England and Wales," Utilities Policy, Elsevier, vol. 7(3), pages 163-188, November.
  11. Hogan, William W, 1992. "Contract Networks for Electric Power Transmission," Journal of Regulatory Economics, Springer, vol. 4(3), pages 211-42, September.
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