Merchant and regulated transmission: theory, evidence and policy

Abstract

Merchant and regulated transmission: theory, evidence and policy EPRG Working Paper 1128 Cambridge Working Paper in Economics 1160 Stephen Littlechild Economists acknowledge the problems of regulated transmission but take different views about the likely efficiency of merchant transmission. This paper examines the evidence on alleged market failure and regulatory failure as experienced in practice in Australia and Argentina. In these examples, merchant transmission (broadly defined to include private initiatives) has generally not exhibited the standard examples of market failure but regulated transmission generally has exhibited the standard examples of regulatory failure. Imperfect information-more specifically, in the form of lack of coordination-has often been a challenge whatever the approach. Policy should therefore seek to improve the regulatory framework and to remove barriers to merchant transmission and private initiatives. An important role for regulation is to facilitate coordination between potential providers and users of transmission lines.

The Impact of Regulation on a Firm’s Incentives to Invest in Emergent Smart Grid Technologies

“…On the other hand, the regulator can enact self-regulatory schemes to facilitate the coordination between potential providers and users of the new infrastructures and, thus, allow private initiatives. Littlechild (2012) proposes such framework for new investments in transmission networks, for which the salient point is "to discover or design the incentive-maximizing and risk-sharing contractual arrangements".…”

Participation of generating companies in transmission investment in electricity markets

“…Moreover, the GenCo should be involved in a transmission project earlier than TSP's schedule. These two constraints are expressed in (15). The GenCo's investment cost over the planning horizon is also limited by (16).…”

“…While in static planning, the entire planning horizon is considered as a single time period, in dynamic planning, the planning horizon is divided into separate periods, and the problem is solved as a multi-stage optimisation. In spite of great effort, only a few research studies are conducted to study the transmission investment and associated risks [1,[15][16][17][18].…”

“…Four transmission investment patterns are discussed in the literature: (a) public investment, which requires the governmental investment, (b) regulated private investment, in which the regulatory entity must provide proper incentives for investment, (c) market-driven transmission investment, in which the financial transmission rights are used to return the investment cost and (d) hybrid model of merchant and regulated transmission investment [1,15]. Since a substantial investment is required to provide a nondiscriminatory environment and a reliable network for all market participants, due to budget limitations, the regulated TSPs will be hardly likely to be able to deal with the large amount of transmission investments [17].…”

Is There Still a Case for Merchant Interconnectors? Insights from an Analysis of Welfare and Distributional Aspects of Options for Network Expansion in the Baltic Sea Region

“…Further, Littlechild (2012) generally argues in favor of merchant interconnectors on the basis of case evidence -in those he finds that merchant investment was superior to what regulators attempted to do.…”