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

Rosellon, Juan; Weigt, Hannes

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

No 1019, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: We propose a price-cap mechanism for electricity-transmission expansion based on redefining transmission output in terms of financial transmission rights. Our mechanism applies the incentive-regulation logic of rebalancing a two-part tariff. First, we test this mechanism in a three-node network. We show that the mechanism intertemporally promotes an investment pattern that relieves congestion, increases welfare, augments the Transco´s profits, and induces convergence of prices to marginal costs. We then apply the mechanism to a grid of northwestern Europe and show a gradual convergence toward a common-price benchmark, an increase in total capacity, and convergence toward the welfare optimum.

Keywords: Electricity transmission expansion; incentive regulation (search for similar items in EconPapers)
JEL-codes: L51 L91 L94 Q40 (search for similar items in EconPapers)
Pages: 28 p.
Date: 2010
New Economics Papers: this item is included in nep-ene and nep-reg
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Citations: View citations in EconPapers (3)

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