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Is combination of nodal pricing and average participation tariff the best solution to coordinate the location of power plants with lumpy transmission investments?

  • Vincent Rious
  • Philippe Dessante
  • Yannick Perez

This paper evaluates the opportunity and efficiency to introduce a two-part tariff to coordinate the location of power plants with lumpy transmission investments. Nodal pricing sends the short run component of such a two-part tariff and we study the case where the average participation tariff sends the long run one. We argue that this solution is helpful because the average participation tariff tackles lumpiness of transmission capacity while being as cost-reflective as possible. Our proposition is evaluated based on a double optimization model where a TSO minimizes the transmission cost while a generator minimizes its own cost that may take into account network constraints and include the average participation tariff. Numerical simulations are performed on a two-node network evolving during twenty years with increasing demand. The joint implementation of nodal pricing and the average participation tariff stays the best combination to coordinate as efficiently as possible the generation and transmission investments, although the optimal set of generation and transmission investments may not be reached because of transmission lumpiness. The simulations show also that implementing locational network tariffs is prioritary over implementing nodal pricing to coordinate more efficiently the location of generation with lumpy transmission investment. In the considered examples, the average participation tariff allows a more efficient location of generation even when the congestion management scheme being redispatch sends no short run locational signal.

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File URL: http://hdl.handle.net/1814/11027
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Paper provided by European University Institute in its series RSCAS Working Papers with number 2009/14.

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Date of creation: 25 Feb 2009
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Handle: RePEc:rsc:rsceui:2009/14
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  1. Hogan, William W, 1992. "Contract Networks for Electric Power Transmission," Journal of Regulatory Economics, Springer, vol. 4(3), pages 211-42, September.
  2. Green, Richard, 1997. "Electricity transmission pricing: an international comparison," Utilities Policy, Elsevier, vol. 6(3), pages 177-184, September.
  3. repec:cup:cbooks:9780521874434 is not listed on IDEAS
  4. Paul L. Joskow, 2013. "Incentive Regulation in Theory and Practice: Electricity Distribution and Transmission Networks," NBER Chapters, in: Economic Regulation and Its Reform: What Have We Learned?, pages 291-344 National Bureau of Economic Research, Inc.
  5. Paul Joskow & Jean Tirole, 2003. "Merchant Transmission Investment," NBER Working Papers 9534, National Bureau of Economic Research, Inc.
  6. Green, Richard, 1997. "Transmission pricing in England and Wales," Utilities Policy, Elsevier, vol. 6(3), pages 185-193, September.
  7. Chao, Hung-Po & Peck, Stephen, 1996. "A Market Mechanism for Electric Power Transmission," Journal of Regulatory Economics, Springer, vol. 10(1), pages 25-59, July.
  8. Brunekreeft, Gert, 2004. "Market-based investment in electricity transmission networks: controllable flow," Utilities Policy, Elsevier, vol. 12(4), pages 269-281, December.
  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. 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.
  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.
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