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

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  • Richard Green

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Abstract

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

Suggested Citation

  • Richard Green, 2007. "Nodal pricing of electricity: how much does it cost to get it wrong?," Journal of Regulatory Economics, Springer, vol. 31(2), pages 125-149, April.
  • Handle: RePEc:kap:regeco:v:31:y:2007:i:2:p:125-149
    DOI: 10.1007/s11149-006-9019-3
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    References listed on IDEAS

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    1. Hsu, Michael, 1997. "An introduction to the pricing of electric power transmission," Utilities Policy, Elsevier, vol. 6(3), pages 257-270, September.
    2. 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.
    3. Green, Richard, 1997. "Electricity transmission pricing: an international comparison," Utilities Policy, Elsevier, vol. 6(3), pages 177-184, September.
    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. 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.
    6. 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.
    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. Andreas Ehrenmann & Karsten Neuhoff, 2009. "A Comparison of Electricity Market Designs in Networks," Operations Research, INFORMS, vol. 57(2), pages 274-286, April.
    9. 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.
    10. Hogan, William W, 1992. "Contract Networks for Electric Power Transmission," Journal of Regulatory Economics, Springer, vol. 4(3), pages 211-242, September.
    11. 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.
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    More about this item

    Keywords

    Electricity transmission pricing; Welfare losses; Market power; L94;

    JEL classification:

    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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