A Merchant Mechanism for Electricity Transmission Expansion

Tarjei Kristiansen and Juan Rosellon

Journal of Regulatory Economics, 2006, vol. 29, issue 2, 167-193

Abstract: We propose a merchant mechanism to expand electricity transmission based on long-term financial transmission rights (FTRs). Due to network loop flows, a change in network capacity might imply negative externalities on existing transmission property rights. The system operator thus needs a protocol for awarding incremental FTRs that maximize investors’ preferences, and preserves certain currently unallocated FTRs (or proxy awards) so as to maintain revenue adequacy. In this paper we define a proxy award as the best use of the current network along the same direction as the incremental awards. We then develop a bi-level programming model for allocation of long-term FTRs according to this rule and apply it to different network topologies. We find that simultaneous feasibility for a transmission expansion project crucially depends on the investor-preference and the proxy-preference parameters. Likewise, for a given amount of pre-existing FTRs the larger the current capacity the greater the need to reserve some FTRs for possible negative externalities generated by the expansion changes. Copyright Springer Science+Business Media, Inc. 2006

Keywords: Electricity transmission; Financial transmission rights; Merchant transmission expansion; Bi-level programming; Power flow model; L51; L91; L94; Q40 (search for similar items in EconPapers)
Date: 2006
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Citations: View citations in EconPapers (46)

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Persistent link: https://EconPapers.repec.org/RePEc:kap:regeco:v:29:y:2006:i:2:p:167-193

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DOI: 10.1007/s11149-006-6034-3

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