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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?

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  • Vincent Rious
  • Philippe Dessante
  • Yannick Perez

Abstract

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.

Suggested Citation

  • Vincent Rious & Philippe Dessante & Yannick Perez, 2009. "Is combination of nodal pricing and average participation tariff the best solution to coordinate the location of power plants with lumpy transmission investments?," RSCAS Working Papers 2009/14, European University Institute.
  • Handle: RePEc:rsc:rsceui:2009/14
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    File URL: http://hdl.handle.net/1814/11027
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    References listed on IDEAS

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    1. Bushnell, James B. & Stoft, Steven E., 1997. "Improving private incentives for electric grid investment," Resource and Energy Economics, Elsevier, vol. 19(1-2), pages 85-108, March.
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    3. Paul L. Joskow, 2014. "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.
    4. Hogan, William W, 1992. "Contract Networks for Electric Power Transmission," Journal of Regulatory Economics, Springer, vol. 4(3), pages 211-242, September.
    5. 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.
    6. Green, Richard, 1997. "Transmission pricing in England and Wales," Utilities Policy, Elsevier, vol. 6(3), pages 185-193, September.
    7. Green, Richard, 1997. "Electricity transmission pricing: an international comparison," Utilities Policy, Elsevier, vol. 6(3), pages 177-184, September.
    8. 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.
    9. 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.
    10. Brunekreeft, Gert, 2004. "Market-based investment in electricity transmission networks: controllable flow," Utilities Policy, Elsevier, vol. 12(4), pages 269-281, December.
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    Citations

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    Cited by:

    1. Georgios Petropoulos & Bert Willems, 2016. "Providing efficient network access to green power generators: A long-term property rights perspective," Working Papers 17317, Bruegel.
    2. Leuthold, Florian & Jeske, Till & Weigt, Hannes & von Hirschhausen, Christian, 2009. "When the Wind Blows Over Europe: A Simulation Analysis and the Impact of Grid Extensions," MPRA Paper 65655, University Library of Munich, Germany.
    3. Joachim Bertsch & Simeon Hagspiel & Lisa Just, 2016. "Congestion management in power systems," Journal of Regulatory Economics, Springer, vol. 50(3), pages 290-327, December.
    4. Groppi, Angelamaria & Fumagalli, Elena, 2014. "Network expansion by a proactive transmission system operator: A case study," Energy Policy, Elsevier, vol. 69(C), pages 610-623.
    5. Dietrich, Kristin & Leuthold, Florian & Weigt, Hannes, 2009. "Will the Market Get it Right? The Placing of New Power Plants in Germany," MPRA Paper 65653, University Library of Munich, Germany.
    6. Weigt, Hannes, 2009. "A Review of Liberalization and Modeling of Electricity Markets," MPRA Paper 65651, University Library of Munich, Germany.
    7. Bertsch, Joachim & Hagspiel, Simeon & Just, Lisa, 2016. "Congestion management in power systems - Long-term modeling framework and large-scale application," EWI Working Papers 2015-3, Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI).

    More about this item

    Keywords

    Generation investment; Lumpy transmission investment; Long run coordination; Locational signals; Efficiency evaluation;

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • K23 - Law and Economics - - Regulation and Business Law - - - Regulated Industries and Administrative Law
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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