A Merchant Mechanism for Electricity Transmission Expansion

Kristiansen, Tarjei; Rosellón, Juan

doi:10.1007/s11149-006-6034-3

Cited by 52 publications

(33 citation statements)

References 26 publications

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“…Alternatively, they 7 In fact, as argued by Joskow and Tirole (2005), this problem remains with FTRs and point-to-point transmissions in general. Ways to deal with the loop-flow problem under an FTR approach are proposed in Hogan (2002a), and Kristiansen and Rosellón (2006). 8 The "complementary charge" is equivalent to the "license access charge" frequently used in the terminology of the United States electricity industry.…”

Section: The Institutional Setupmentioning

confidence: 99%

Toward a Combined Merchant-Regulatory Mechanism for Electricity Transmission Expansion

2010

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OverviewElectricity transmission pricing and transmission grid expansion have received increasing regulatory and analytical attention in recent years. Since electricity transmission is a very special service with unusual characteristics, such as loop flows, the approaches have been largely tailor-made and not simply taken from the general economic literature or from the more specific but still general incentive regulation literature. An exception has been Vogelsang (2001), who postulated transmission cost and demand functions with fairly general properties and then adapted known regulatory adjustment processes to the electricity transmission problem. A concern with this approach has been that the properties of transmission cost and demand functions are little known but are suspected to differ from conventional functional forms. The assumed cost and demand properties in Vogelsang (2001) may actually not hold for transmission companies (Transcos). Loop-flows imply that certain investments in transmission upgrades cause negative network effects on other transmission links, so that capacity is multidimensional. Total network capacity might even decrease due to the addition of new capacity in certain transmission links. The transmission capacity cost function can be discontinuous. There are two disparate approaches to transmission investment: one employs the theory based on long-run financial rights (LTFTR) to transmission (merchant approach), while the other is based on the incentive-regulation hypothesis (regulatory approach). An independent system operator (ISO) handles the actual dispatch and operational pricing. The transmission firm is regulated through benchmark or price regulation to provide long-term investment incentives while avoiding congestion. In this paper we consider the elements that could combine the merchant and regulatory approaches in a setting with price-taking electricity generators and loads. MethodsBased on LTFTRs, merchant mechanisms are easiest to understand for incrementally small expansions in meshed networks under an ISO environment. The price-cap method seeks to regulate a monopoly Transco. The regulatory goal in this paper is an extension of Vogelsang (2001) for meshed projects. Transmission output is redefined in terms of incremental LTFTRs (or total LTFTRs, if a long period is assumed) so as to be able to apply the Vogelsang's incentive mechanism to a meshed network. For lumpy and large transmission projects a fixed part of the tariff plays the role of a complementary charge. The variable part of the tariff is based on nodal prices; pricing for the different cost components of transmission is such that they do not conflict with each other (fixed costs are allocated so that the variable charges are able to reflect nodal prices); variations in fixed charges over time partially counteract the variability of nodal prices giving some price insurance to the market participants. * Contact author: División de Economía, CIDE, Carret. México-Toluca 3655, Lomas de Santa Fé, C.P. 01210,...

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Section: The Institutional Setupmentioning

confidence: 99%

Toward a Combined Merchant-Regulatory Mechanism for Electricity Transmission Expansion

2010

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“…Léautier 2000, Kristiansen and Rosellón 2006, Tanaka 2007, Léautier and Thelen 2009, Hogan et al 2010. Finding optimal regulatory mechanisms is difficult given the specific physical characteristics of electricity networks like negative local externalities due to loop flows, i.e.…”

Section: Optimal Transmission Expansionmentioning

confidence: 99%

A Welfare Analysis of the Electricity Transmission Regulatory Regime in Germany

2015

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractWe analyze the current regulatory regime for electricity transmission in Germany, which combines network planning with both cost-plus and revenue-cap regulations. After reviewing international experiences on transmission investment, we first make a qualitative assessment of the overall German regime. The German TSOs have in general incentives to overinvest and inefficiently inflate costs. We further develop two models to analyze the transmission planning process. In the first model there is no trade-off between transmission expansion and generation dispatch. This is a modeling set-up similar to the one actually used in the German transmission planning (Netzentwicklungsplan). A second model alternatively allows for such a trade-off, and thus represents an optimal way of transmission network planning. Simulations with the two models are carried out and compared so as to illustrate the amount of excessive transmission capacity investment and welfare losses associated with the current regime.Keywords: Transmission planning, nodal prices, congestion management, electricity, Germany.

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“…FTRs are subsequently calculated as hedges from nodal price differences. The ISO retains some capacity or FTRs in order to deal with externalities caused by loop-flows, so that the agent expanding a transmission link implicitly pays back for the possible loss of property rights of other agents (Bushnell andStoft, 1997, Kristiansen andRosellón, 2006). FTR auctions have been implemented mainly in Northeast USA (NYISO, PJM ISO, and New England ISO).…”

Section: Literature Reviewmentioning

confidence: 99%

Power System Transformation towards Renewables: An Evaluation of Regulatory Approaches for Network Expansion

2013

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. July 2013 Terms of use: Documents in AbstractWe analyze various regulatory regimes for electricity transmission investment in the context of a transformation of the power system towards renewable energy. We study distinctive developments of the generation mix with different implications on network congestion, assuming that a shift from conventional power plants towards renewables may go along with exogenous shocks on transmission requirements, which may be either of temporary or permanent nature. We specifically analyze the relative performance of a combined merchant-regulatory price-cap mechanism, a cost-based rule, and a non-regulated approach in dynamic generation settings. Through application in a stylized two-node network, we find that incentive regulation may perform satisfactorily only when appropriate weights are used. While quasi-ideal weights generally restore the beneficial properties that incentive regulatory mechanisms are well-known for in static settings, pure Laspeyres weights may either lead to overinvestment (stranded investments) or delayed investments as compared to the welfare optimum benchmark. Stranded investments could then be avoided through proper handling of weights. Model results indicate that using average LaspeyresPaasche weights appears to be an appropriate strategy in the context of permanently or temporarily increasing network congestion. Our analysis motivates further research aimed to characterize optimal regulation for transmission expansion in the context of renewable integration.

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A Merchant Mechanism for Electricity Transmission Expansion

Cited by 52 publications

References 26 publications

Toward a Combined Merchant-Regulatory Mechanism for Electricity Transmission Expansion

Toward a Combined Merchant-Regulatory Mechanism for Electricity Transmission Expansion

A Welfare Analysis of the Electricity Transmission Regulatory Regime in Germany

Power System Transformation towards Renewables: An Evaluation of Regulatory Approaches for Network Expansion

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