IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/22843.html
   My bibliography  Save this paper

A Dynamic Incentive Mechanism for Transmission Expansion in Electricity Networks – Theory, Modeling and Application

Author

Listed:
  • Rosellon, Juan
  • Weigt, Hannes

Abstract

This paper examines the Hogan-Rosellón-Vogelsang (2007) (HRV) incentive mechanism for transmission expansion, and tests it for different network topologies. This new mechanism is based upon redefining transmission output in terms of point-to-point transactions or financial transmission rights (FTRs) and applies Vogelsang’s (2001) incentive-regulation logic that proposes rebalancing the variable and fixed parts of a two-part tariff to promote efficient, long-term expansion. We analyze three main topics: first, the behavior of cost functions for distinct network topologies; second, the HRV regulatory approach (incorporated into an MPEC Problem and tested for a three-node network), and third an application to a simplified network. The results suggest that the mechanism is generally suited as an incentive tool for network extensions.

Suggested Citation

  • Rosellon, Juan & Weigt, Hannes, 2008. "A Dynamic Incentive Mechanism for Transmission Expansion in Electricity Networks – Theory, Modeling and Application," MPRA Paper 22843, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:22843
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/22843/1/MPRA_paper_22843.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Paul Joskow & Jean Tirole, 2005. "Merchant Transmission Investment," Journal of Industrial Economics, Wiley Blackwell, vol. 53(2), pages 233-264, June.
    2. Sappington, David E M & Sibley, David S, 1988. "Regulating without Cost Information: The Incremental Surplus Subsidy Scheme," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(2), pages 297-306, May.
    3. Ramirez, Jose Carlos & Rosellon, Juan, 2002. "Pricing natural gas distribution in Mexico," Energy Economics, Elsevier, vol. 24(3), pages 231-248, May.
    4. Vogelsang, Ingo, 2001. "Price Regulation for Independent Transmission Companies," Journal of Regulatory Economics, Springer, vol. 20(2), pages 141-165, September.
    5. Seth Blumsack & Lester B. Lave & Marija Ilic, 2007. "A Quantitative Analysis of the Relationship Between Congestion and Reliability in Electric Power Networks," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 73-100.
    6. William Hogan & Juan Rosellón & Ingo Vogelsang, 2010. "Toward a combined merchant-regulatory mechanism for electricity transmission expansion," Journal of Regulatory Economics, Springer, vol. 38(2), pages 113-143, October.
    7. 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.
    8. 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.
    9. Neu, Werner, 1993. "Allocative Inefficiency Properties of Price-Cap Regulation," Journal of Regulatory Economics, Springer, vol. 5(2), pages 159-182, June.
    10. Tarjei Kristiansen & Juan Rosellón, 2006. "A Merchant Mechanism for Electricity Transmission Expansion," Journal of Regulatory Economics, Springer, vol. 29(2), pages 167-193, March.
    11. Thomas-Olivier Leautier, 2000. "Regulation of an Electric Power Transmission Company," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 61-92.
    12. Laffont, Jean-Jacques & Tirole, Jean, 1996. "Creating Competition through Interconnection: Theory and Practice," Journal of Regulatory Economics, Springer, vol. 10(3), pages 227-256, November.
    13. Bertoletti, Paolo & Poletti, Clara, 1997. "Welfare effects of discriminatory two-part tariffs constrained by price caps," Economics Letters, Elsevier, vol. 56(3), pages 293-298, November.
    14. Fraser, Rob, 1995. "The Relationship between the Costs and Prices of a Multi-product Monopoly: The Role of Price-Cap Regulation," Journal of Regulatory Economics, Springer, vol. 8(1), pages 23-31, July.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jonas Egerer & Juan Rosellon & Wolf-Peter Schill, 2015. "Power System Transformation toward Renewables: An Evaluation of Regulatory Approaches for Network Expansion," The Energy Journal, , vol. 36(4), pages 105-128, October.
    2. William Hogan & Juan Rosellón & Ingo Vogelsang, 2010. "Toward a combined merchant-regulatory mechanism for electricity transmission expansion," Journal of Regulatory Economics, Springer, vol. 38(2), pages 113-143, October.
    3. Dagobert Brito & Juan Rosellón, 2011. "Lumpy Investment in Regulated Natural Gas Pipelines: An Application of the Theory of the Second Best," Networks and Spatial Economics, Springer, vol. 11(3), pages 533-553, September.
    4. Juan Rosellón, Ingo Vogelsang, and Hannes Weigt, 2012. "Long-run Cost Functions for Electricity Transmission," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1).
    5. Juan Rosellon & Hannes Weigt, 2007. "A Combined Merchant-Regulatory Mechanism for Electricity Transmission Expansion in Europe," Working Papers DTE 396, CIDE, División de Economía.
    6. Anne Neumann & Juan Rosellón & Hannes Weigt, 2015. "Removing Cross-Border Capacity Bottlenecks in the European Natural Gas Market—A Proposed Merchant-Regulatory Mechanism," Networks and Spatial Economics, Springer, vol. 15(1), pages 149-181, March.
    7. Wolf-Peter Schill & Jonas Egerer & Juan Rosellón, 2015. "Testing regulatory regimes for power transmission expansion with fluctuating demand and wind generation," Journal of Regulatory Economics, Springer, vol. 47(1), pages 1-28, February.
    8. Ingo Vogelsang, 2018. "Can Simple Regulatory Mechanisms Realistically be used for Electricity Transmission Investment? The Case of H-R-G-V," Economics of Energy & Environmental Policy, International Association for Energy Economics, vol. 0(Number 1).
    9. Rosellon, Juan, 2007. "An incentive mechanism for electricity transmission expansion in Mexico," Energy Policy, Elsevier, vol. 35(5), pages 3003-3014, May.
    10. Makoto TANAKA, 2005. "Optimal Transmission Capacity under Nodal Pricing and Incentive Regulation for Transco," Discussion papers 05021, Research Institute of Economy, Trade and Industry (RIETI).
    11. Juan Rosellón, 2009. "Mechanisms for the Optimal Expansion of Electricity Transmission Networks," Chapters, in: Joanne Evans & Lester C. Hunt (ed.), International Handbook on the Economics of Energy, chapter 24, Edward Elgar Publishing.
    12. Ingo Vogelsang, 2006. "Electricity Transmission Pricing and Performance-based Regulation," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 97-126.
    13. Bastian Henze & Charles Noussair & Bert Willems, 2012. "Regulation of network infrastructure investments: an experimental evaluation," Journal of Regulatory Economics, Springer, vol. 42(1), pages 1-38, August.
    14. Stephen Littlechild, 2012. "Merchant and regulated transmission: theory, evidence and policy," Journal of Regulatory Economics, Springer, vol. 42(3), pages 308-335, December.
    15. Brunekreeft, Gert & Neuhoff, Karsten & Newbery, David, 2005. "Electricity transmission: An overview of the current debate," Utilities Policy, Elsevier, vol. 13(2), pages 73-93, June.
    16. Benjamin, Richard, 2013. "A two-part tariff for financing transmission expansion," Utilities Policy, Elsevier, vol. 27(C), pages 98-107.
    17. Hesamzadeh, M.R. & Rosellón, J. & Gabriel, S.A. & Vogelsang, I., 2018. "A simple regulatory incentive mechanism applied to electricity transmission pricing and investment," Energy Economics, Elsevier, vol. 75(C), pages 423-439.
    18. Ruderer, Dominik & Zöttl, Gregor, 2018. "Transmission pricing and investment incentives," Utilities Policy, Elsevier, vol. 55(C), pages 14-30.
    19. Biggar, Darryl R. & Hesamzadeh, Mohammad Reza, 2022. "An integrated theory of dispatch and hedging in wholesale electric power markets," Energy Economics, Elsevier, vol. 112(C).
    20. Thomas-Olivier Léautier & Véronique Thelen, 2009. "Optimal expansion of the power transmission grid: why not?," Journal of Regulatory Economics, Springer, vol. 36(2), pages 127-153, October.

    More about this item

    Keywords

    Electricity transmission expansion; incentive regulation; merchant investment; congestion management; Europe;
    All these keywords.

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L91 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Transportation: General
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:22843. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.