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Long term locational prices and investment incentives in the transmission of electricity


  • SMEERS, Yves


We present a model of generation and network investment in a competitive electricity system. The model focuses on the duality of long-and short-term locational signals introduced in the European Regulation 1228/2003 for enhancing cross border trade of electricity among Member States. The model assumes that the market consists of spot and transmission submarkets. Generators, consumers and a TSO operate on that market; none of these agents has market power. Lumpiness of investments is one of the problems that may render generation and network adequacy difficult to achieve. We take up this question and apply some formalism formerly developed by O'Neill and co-authors for the unit commitment problem in order to construct multipart tariffs that insure the adequate development of the resources both in generation and the grid. In the process, we recover the standard nodal pricing as part of that multipart tariff. We address the questions of cost reflectiveness and non discrimination imposed by Regulation 1228/2003.

Suggested Citation

  • SMEERS, Yves, 2005. "Long term locational prices and investment incentives in the transmission of electricity," CORE Discussion Papers 2005030, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  • Handle: RePEc:cor:louvco:2005030

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    References listed on IDEAS

    1. Paul Joskow & Jean Tirole, 2005. "Merchant Transmission Investment," Journal of Industrial Economics, Wiley Blackwell, vol. 53(2), pages 233-264, June.
    2. O'Neill, Richard P. & Sotkiewicz, Paul M. & Hobbs, Benjamin F. & Rothkopf, Michael H. & Stewart, William R., 2005. "Efficient market-clearing prices in markets with nonconvexities," European Journal of Operational Research, Elsevier, vol. 164(1), pages 269-285, July.
    3. Herbert Scarf, 1994. "The Allocation of Resources in the Presence of Indivisibilities," Journal of Economic Perspectives, American Economic Association, vol. 8(4), pages 111-128, Fall.
    4. Vogelsang, Ingo, 2001. "Price Regulation for Independent Transmission Companies," Journal of Regulatory Economics, Springer, vol. 20(2), pages 141-165, September.
    5. Hogan, William W, 1992. "Contract Networks for Electric Power Transmission," Journal of Regulatory Economics, Springer, vol. 4(3), pages 211-242, September.
    6. Rosellón Juan, 2003. "Different Approaches Towards Electricity Transmission Expansion," Review of Network Economics, De Gruyter, vol. 2(3), pages 1-32, September.
    7. Crema, Alejandro, 1995. "Average shadow price in a mixed integer linear programming problem," European Journal of Operational Research, Elsevier, vol. 85(3), pages 625-635, September.
    8. 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.
    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 215-248, November.
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    Cited by:

    1. Lise, Wietze & Hobbs, Benjamin F. & Hers, Sebastiaan, 2008. "Market power in the European electricity market--The impacts of dry weather and additional transmission capacity," Energy Policy, Elsevier, vol. 36(4), pages 1331-1343, April.

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