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Merchant Transmission Investment

  • Paul Joskow
  • Jean Tirole

We examine the performance attributes of a merchant transmission investment framework that relies on market driven' transmission investment to provide the infrastructure to support competitive wholesale markets for electricity. Under a stringent set of assumptions, the merchant investment model has a remarkable set of attributes that appear to solve the natural monopoly problem traditionally associated with electricity transmission networks. We extend the merchant investment model to incorporate imperfections in wholesale electricity markets, lumpiness in transmission investment opportunities, stochastic attributes of transmission networks and associated property rights definition issues, the effects of behavior of transmission owners and system operators on transmission capacity, maintenance and reliability, coordination and bargaining considerations, forward contract, commitment and asset specificity issues. Incorporating these more realistic attributes of transmission networks and the behavior of transmission owners and system operators undermines the attractive properties of the merchant model and leads to inefficient transmission investment decisions.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9534.

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Date of creation: Mar 2003
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Publication status: published as Joskow, Paul and Jean Tirole. "Merchant Transmission Investment," Journal of Industrial Economics, 2005, v53(2,Jun), 233-264.
Handle: RePEc:nbr:nberwo:9534
Note: IO
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  1. Glachant, Jean-Michel & Pignon, Virginie, 2005. "Nordic congestion's arrangement as a model for Europe? Physical constraints vs. economic incentives," Utilities Policy, Elsevier, vol. 13(2), pages 153-162, June.
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  9. Bushnell, James & Stoft, Steven, 1997. "Improving Private Incentives for Electric Grid Investment," Staff General Research Papers 31549, Iowa State University, Department of Economics.
  10. Wu, Felix, et al, 1996. "Folk Theorems on Transmission Access: Proofs and Counterexamples," Journal of Regulatory Economics, Springer, vol. 10(1), pages 5-23, July.
  11. 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.
  12. Oren, Shmuel S. & Spiller, Pablo T. & Varaiya, Pravin & Wu, Felix, 1995. "Nodal prices and transmission rights: A critical appraisal," The Electricity Journal, Elsevier, vol. 8(3), pages 24-35, April.
  13. Green, Richard, 1999. "The Electricity Contract Market in England and Wales," Journal of Industrial Economics, Wiley Blackwell, vol. 47(1), pages 107-24, March.
  14. Brousseau, Eric & Glachant, Jean-Michel, 2002. "The economics of contracts: Theories and applications," Economics Papers from University Paris Dauphine 123456789/12331, Paris Dauphine University.
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  16. Aghion, Philippe & Bolton, Patrick, 1987. "Contracts as a Barrier to Entry," American Economic Review, American Economic Association, vol. 77(3), pages 388-401, June.
  17. Robert Wilson, 2002. "Architecture of Power Markets," Econometrica, Econometric Society, vol. 70(4), pages 1299-1340, July.
  18. Steven Stoft, 1999. "Financial Transmission Rights Meet Cournot: How TCCs Curb Market Power," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 1-23.
  19. Hogan, William W, 1992. "Contract Networks for Electric Power Transmission," Journal of Regulatory Economics, Springer, vol. 4(3), pages 211-42, September.
  20. Holmstrom, Bengt & Tirole, Jean, 2000. "Liquidity and Risk Management," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(3), pages 295-319, August.
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