Incentives for Transmission Investment in the PJM Electricity Market: FTRs or Regulation (or Both?)

Juan Rosellon, Zdenka Mysliková and Eric Zenón

No 1026, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: This paper presents an application of a mechanism that provides incentives to promote transmission network expansion in the area of the US electric system known as PJM. The applied mechanism combines the merchant and regulatory approaches to attract investment into transmission grids. It is based on rebalancing a two-part tariff in the framework of a wholesale electricity market with locational pricing. The expansion of the network is carried out through the sale of financial transmission rights for the congested lines. The mechanism is tested for 14-node and 17-node geographical coverage areas of PJM. Under Laspeyres weights, it is shown that prices converge to the marginal cost of generation, the congestion rent decreases, and the total social welfare increases. The mechanism is shown to adjust prices effectively given either non-peak or peak demand.

Keywords: Electricity transmission expansion; incentive regulation; PJM (search for similar items in EconPapers)
JEL-codes: L51 L91 L94 Q40 (search for similar items in EconPapers)
Pages: 27 p.
Date: 2010
New Economics Papers: this item is included in nep-ene and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Incentives for transmission investment in the PJM electricity market: FTRs or regulation (or both?) (2011)
Working Paper: Incentives for Transmission Investment in the PJM Electricity Market: FTRs or Regulation (or both?) (2009)
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