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Transmission and generation investment in electricity markets: The effects of market splitting and network fee regimes

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  • Grimm, Veronika
  • Martin, Alexander
  • Weibenzahl, Martin
  • Zoettl, Gregor

Abstract

In this paper we propose a three-level computational equilibrium model that allows to analyze the impact of the regulatory environment on transmission line expansion (by the regulator) and investment in generation capacity (by private firms) in liberalized electricity markets. The basic model analyzes investment decisions of the transmission operator (TO) and private firms in expectation of an energy only market and cost-based redispatch. In different specifications we consider the cases of one versus two price zones (market splitting) and analyze different approaches to recover network cost, in particular lump sum, capacity based, and energy based fees. In order to compare the outcomes of our multi-stage market model with the first best benchmark, we also solve the corresponding integrated planer problem. In two simple test networks we illustrate that energy only markets can lead to suboptimal locational decisions for generation capacity and thus, imply excessive network expansion. Market splitting heals those problems only partially. Those results obtain for both, capacity and energy based network tariffs, although investment slightly differs across those regimes.

Suggested Citation

  • Grimm, Veronika & Martin, Alexander & Weibenzahl, Martin & Zoettl, Gregor, 2014. "Transmission and generation investment in electricity markets: The effects of market splitting and network fee regimes," FAU Discussion Papers in Economics 04/2014, Friedrich-Alexander University Erlangen-Nuremberg, Institute for Economics.
  • Handle: RePEc:zbw:iwqwdp:042014
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    References listed on IDEAS

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    3. Neuhoff, Karsten & Barquin, Julian & Boots, Maroeska G. & Ehrenmann, Andreas & Hobbs, Benjamin F. & Rijkers, Fieke A.M. & Vazquez, Miguel, 2005. "Network-constrained Cournot models of liberalized electricity markets: the devil is in the details," Energy Economics, Elsevier, vol. 27(3), pages 495-525, May.
    4. Ehrenmann, Andreas & Smeers, Yves, 2005. "Inefficiencies in European congestion management proposals," Utilities Policy, Elsevier, vol. 13(2), pages 135-152, June.
    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.
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    7. Sauma, Enzo E. & Oren, Shmuel S., 2009. "Do generation firms in restructured electricity markets have incentives to support social-welfare-improving transmission investments?," Energy Economics, Elsevier, vol. 31(5), pages 676-689, September.
    8. Enzo Sauma & Shmuel Oren, 2006. "Proactive planning and valuation of transmission investments in restructured electricity markets," Journal of Regulatory Economics, Springer, vol. 30(3), pages 358-387, November.
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    14. Grimm, Veronika & Zöttl, Gregor, 2010. "Investment Incentives and Electricity Spot Market Design," Discussion Papers in Economics 11705, University of Munich, Department of Economics.
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    Cited by:

    1. Claudia Kemfert & Clemens Gerbaulet & Christian von Hirschhausen, 2016. "Stromnetze und Speichertechnologien für die Energiewende - eine Analyse mit Bezug zur Diskussion des EEG 2016: Gutachten im Auftrag der Hermann-Scheer-Stiftung," DIW Berlin: Politikberatung kompakt, DIW Berlin, German Institute for Economic Research, edition 0, volume 112, number pbk112.
    2. Gert Brunekreeft & Mika Goto & Roland Meyer & Masahiro Maruyama & Toru Hattori, 2014. "Unbundling of Electricity Transmission System Operators in Germany – An Experience Report," Bremen Energy Working Papers 0016, Bremen Energy Research.

    More about this item

    Keywords

    Electricity markets; Network Expansion; Generation Expansion; Investment Incentives; Computational Equilibrium Models; Transmission Management;

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