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Electricity auctions in the presence of transmission constraints and transmission costs

Mario Blázquez de Paz

Energy Economics, 2018, vol. 74, issue C, 605-627

Abstract: Electricity markets are moving through integration around the world. However, our understanding of those markets is still limited. I characterize the Bertrand equilibrium in a discriminatory-price electricity auction when suppliers submit a single offer price for their entire production capacity and they face transmission constraints and linear tariffs for the injection of electricity into the grid. With point of connection tariffs, which are used in the majority of the European countries, suppliers pay a tariff for the total electricity injected into the grid. In contrast, with transmission tariffs, suppliers only pay a tariff for the electricity sold in the other market. Transmission tariffs outperform point of connection tariffs by maximizing consumers' welfare and transmission efficiency. The consequences of an increase in transmission capacity differ considerably depending on the tariff. If the transmission tariffs are zero, an increase in transmission capacity is pro-competitive. In contrast, if the transmission tariffs are positive, an increase in transmission capacity is pro-competitive only when the transmission capacity is low.

Keywords: Electricity auctions; Wholesale electricity markets; Transmission capacity constraints; Network tariffs; Energy economics (search for similar items in EconPapers)
JEL-codes: D43 D44 L13 L94 (search for similar items in EconPapers)
Date: 2018
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