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Power System Transformation towards Renewables: An Evaluation of Regulatory Approaches for Network Expansion

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  • Jonas Egerer
  • Juan Rosellón
  • Wolf-Peter Schill

Abstract

We analyze various regulatory regimes for electricity transmission investment in the context of a transformation of the power system towards renewable energy. We study distinctive developments of the generation mix with different implications on network congestion, assuming that a shift from conventional power plants towards renewables may go along with exogenous shocks on transmission requirements, which may be either of temporary or permanent nature. We specifically analyze the relative performance of a combined merchant-regulatory price-cap mechanism, a cost-based rule, and a non-regulated approach in dynamic generation settings. Through application in a stylized two-node network, we find that incentive regulation may perform satisfactorily only when appropriate weights are used. While quasi-ideal weights generally restore the beneficial properties that incentive regulatory mechanisms are well-known for in static settings, pure Laspeyres weights may either lead to overinvestment (stranded investments) or delayed investments as compared to the welfare optimum benchmark. Stranded investments could then be avoided through proper handling of weights. Model results indicate that using average Laspeyres-Paasche weights appears to be an appropriate strategy in the context of permanently or temporarily increasing network congestion. Our analysis motivates further research aimed to characterize optimal regulation for transmission expansion in the context of renewable integration.

Suggested Citation

  • Jonas Egerer & Juan Rosellón & Wolf-Peter Schill, 2013. "Power System Transformation towards Renewables: An Evaluation of Regulatory Approaches for Network Expansion," Discussion Papers of DIW Berlin 1312, DIW Berlin, German Institute for Economic Research.
    • Handle: RePEc:diw:diwwpp:dp1312
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    Cited by:

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    2. Fernando Fuentes & Pablo Serra, 2022. "Chilean Electric Transmission Regulation: From a Merchant Approach to Central Planning," Energies, MDPI, vol. 15(12), pages 1-15, June.
    3. Espinosa, Rubi & Rosellon, Juan, 2017. "Optimal Transmission Tariff Regulation for the Southern Baja-Californian Electricity Network System," MPRA Paper 98092, University Library of Munich, Germany.
    4. Davi-Arderius, Daniel & Jamasb, Tooraj & Rosellon, Juan, 2024. "Network Operation and Constraints and the Path to Net Zero," Working Papers 8-2024, Copenhagen Business School, Department of Economics.
    5. Anne Neumann & Juan Rosellón & Hannes Weigt, 2015. "Removing Cross-Border Capacity Bottlenecks in the European Natural Gas Market—A Proposed Merchant-Regulatory Mechanism," Networks and Spatial Economics, Springer, vol. 15(1), pages 149-181, March.
    6. Zenón, Eric & Rosellón, Juan, 2017. "Optimal transmission planning under the Mexican new electricity market," Energy Policy, Elsevier, vol. 104(C), pages 349-360.
    7. Jonas Egerer, Clemens Gerbaulet, and Casimir Lorenz, 2016. "European Electricity Grid Infrastructure Expansion in a 2050 Context," The Energy Journal, International Association for Energy Economics, vol. 0(Sustainab).
    8. Ali Darudi & Hannes Weigt, 2024. "Review and Assessment of Decarbonized Future Electricity Markets," Energies, MDPI, vol. 17(18), pages 1-38, September.
    9. Davi-Arderius, Daniel & Jamasb, Tooraj & Rosellon, Juan, 2025. "Network Operation Constraints on the Path to Net Zero," Applied Energy, Elsevier, vol. 382(C).
    10. Claudia Kemfert & Friedrich Kunz & Juan Rosellón, 2015. "A Welfare Analysis of the Electricity Transmission Regulatory Regime in Germany," Discussion Papers of DIW Berlin 1492, DIW Berlin, German Institute for Economic Research.
    11. Bo-Wen Yi & Wolfgang Eichhammer & Benjamin Pfluger & Ying Fan & Jin-Hua Xu, 2019. "The Spatial Deployment of Renewable Energy Based on China’s Coal-heavy Generation Mix and Inter-regional Transmission Grid," The Energy Journal, , vol. 40(4), pages 45-74, July.
    12. Li, Yuan & Zhou, You & Yi, Bo-Wen & Wang, Ya, 2021. "Impacts of the coal resource tax on the electric power industry in China: A multi-regional comprehensive analysis," Resources Policy, Elsevier, vol. 70(C).
    13. Schill, Wolf-Peter & Egerer, Jonas & Rosellón, Juan, 2015. "Testing Regulatory Regimes for Power Transmission Expansion with Fluctuating Demand and Wind Generation," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 47(1), pages 1-28.
    14. Brekke, Kjell Arne & Golombek, Rolf & Kaut, Michal & Kittelsen, Sverre A.C. & Wallace, Stein W., 2017. "Stochastic energy market equilibrium modeling with multiple agents," Energy, Elsevier, vol. 134(C), pages 984-990.

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    More about this item

    Keywords

    Electricity transmission; incentive regulation; renewable integration; Laspeyres/Paasche weights; ideal weights;
    All these keywords.

    JEL classification:

    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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