Strategic investment in merchant transmission: the impact of capacity utilization rules

Federico Boffa, Viswanath Pingali () and Francesca Sala ()
Additional contact information
Viswanath Pingali: Indian Institute of Management Ahmedabad
Francesca Sala: Competition and Markets Authority

No 2015/12, Working Papers from Institut d'Economia de Barcelona (IEB)

Abstract: In this paper we look at the relative merits of two capacity utilization regimes in the merchant electricity transmission network: Must offer (Mo) where the entire capacity installed is made available for transmission and Non Must Offer (NMo) where some capacity could be withheld. We look at two specific cases: (i) Demand for transmission varies across time, and (ii) Vertical integration is allowed between investors in transmission network and electricity generators. In the case of time-varying demand under Mo, we find that a monopolist may underinvest in transmission when compared to NMo, although NMo may lead to more capacity withholding. In the case of vertical integration, we find that when the market power is with the generators of the exporting node, without vertical integration no welfare-enhancing merchant investment would occur. Further, if the generators in the importing node have market power, which of the two regimes is welfare enhancing depends on the parameter values. In case vertical integration is better, then Mo is better than NMo. Finally, we also argue that the incentive to collude among various transmission network investors is mitigated with Mo in place.

Keywords: Electricity transmission; merchant lines; capacity utilization; vertical integration; collusion (search for similar items in EconPapers)
JEL-codes: D24 L94 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2015
New Economics Papers: this item is included in nep-com, nep-ene and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Journal Article: Strategic investment in merchant transmission: The impact of capacity utilization rules (2015)
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