Transmission investment under uncertainty: Reconciling private and public incentives

Maria Lavrutich, Verena Hagspiel and Afzal S. Siddiqui

European Journal of Operational Research, 2023, vol. 304, issue 3, 1167-1188

Abstract: Private companies (PCs) in restructured electricity industries determine facility investment timing and sizing. Such decisions maximize the PC’s expected profit (rather than social welfare) under uncertainty. By anticipating the PC’s incentives, a welfare-maximizing transmission system operator (TSO) shapes the network to align public and private objectives. Via an option-based approach, we first quantify welfare losses from the PC’s and TSO’s conflicting objectives. We show that by anticipating the optimal timing and capacity decisions of the profit-maximizing PC, the TSO is able to reduce, though not eliminate, welfare loss. Next, we exploit the dependence of the PC’s capacity on the TSO’s infrastructure design to devise a proactive transmission-investment strategy. Hence, we mitigate welfare losses arising from misaligned incentives even in relatively uncertain markets.

Keywords: Decision analysis; Investment under uncertainty; Transmission planning; Capacity choice; Real options (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:304:y:2023:i:3:p:1167-1188

DOI: 10.1016/j.ejor.2022.04.038

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