An economic assessment of congestion management methods for electricity transmission networks

R.A. Hakvoort and L.J. De Vries

Competition and Regulation in Network Industries, 2002, vol. 3, issue 4, 425-467

Abstract: This paper provides an economic analysis of five different congestion management methods which can be used to handle congestion in electricity transmission networks: explicit auctioning, implicit auctioning, market splitting, redispatching and counter trading. These methods all have the objective to provide fair and non-discriminatory access to scarce transmission capacity in an economically efficient manner. This paper evaluates the theoretical economic efficiency of each of these methods. For this purpose an economic model is made of each method. In addition, some practical aspects of these congestion management methods are reviewed. The main conclusion is that all of the reviewed congestion management methods have, in theory, the potential of being economically efficient in the short term. That is, if they work well, they will all lead to the most efficient dispatch of generation given the existing transmission constraints. Their differences lie in the distribution of costs, their implementation costs, their practical feasibility, their susceptibility to strategic behaviour and their long-term incentives to generators and network operators. Finally, it is explained why congestion pricing methods (explicit auctioning, implicit auctioning and market splitting) in most cases are preferable as a solution for structural congestion over the corrective methods (redispatching and counter trading). They generate better economic incentives for users of the congested links which probably make them more efficient in the long term.

Date: 2002
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