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Long-run Cost Functions for Electricity Transmission

Author

Listed:
  • Juan Rosellon

    (Division of Economics, CIDE)

  • Ingo Vogelsang
  • Hannes Weigt

Abstract

Electricity transmission has become the pivotal industry segment for electricity restructuring. Yet, little is known about the shape of transmission cost functions. Reasons for this can be a lack of consensus about the definition of transmission output and the complexity of the relationship between optimal grid expansion and output expansion. Knowledge of transmission cost functions could help firms (Transcos) and regulators plan transmission expansion and could help design regulatory incentive mechanisms. We explore transmission cost functions when the transmission output is defined as point-to-point transactions or financial transmission right (FTR) obligations and particularly explore expansion under loop-flows. We test the behavior of FTR-based cost functions for distinct network topologies and find evidence that cost functions defined as FTR outputs are piecewise differentiable and that they contain sections with negative marginal costs. Simulations, however, illustrate that such unusual properties do not stand in the way of applying price-cap incentive mechanisms to real-world transmission expansion.

Suggested Citation

  • Juan Rosellon & Ingo Vogelsang & Hannes Weigt, 2009. "Long-run Cost Functions for Electricity Transmission," Working Papers DTE 465, CIDE, División de Economía.
    • Handle: RePEc:emc:wpaper:dte465
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    References listed on IDEAS

    as
    1. Rosellón, Juan & Myslíková, Zdenka & Zenón, Eric, 2011. "Incentives for transmission investment in the PJM electricity market: FTRs or regulation (or both?)," Utilities Policy, Elsevier, vol. 19(1), pages 3-13, January.
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    2. Herrera, Luis Ángel & Rosellón, Juan, 2014. "On distributive effects of optimal regulation for power grid expansion," Energy Policy, Elsevier, vol. 69(C), pages 189-204.
    3. von Hirschhausen, Christian, 2012. "Green electricity investment in Europe: Development scenarios for generation and transmission investments," EIB Working Papers 2012/04, European Investment Bank (EIB).

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    Keywords

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    JEL classification:

    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights

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