A Combined Merchant-Regulatory Mechanism for Electricity Transmission Expansion in Europe

Juan Rosellon and Hannes Weigt

No DTE 396, Working Papers from CIDE, División de Economía

Abstract: This paper provides a new mechanism on how to overcome transmission expansion in the specific European context. We test the Hogan-Rosellón-Vogelsang (2007) (HRV) incentive mechanism for different network topologies. The HRV mechanism is based on redefining the output of transmission in terms of point-to-point transactions or financial transmission rights (FTRs), and applies the incentive-regulation logic in Vogelsang (2001) that proposed rebalancing the variable and fixed parts of a two-part tariff to promote the efficient long-term expansion of the grid. We analyze three main topics: first, the behavior of cost functions is analyzed for distinct network topologies; second, the HRV regulatory approach is incorporated in a MPEC Problem and tested for a three node network, and, finally, we apply the mechanism to a simplified network in Northwestern Europe. The results suggest that the mechanism is generally suited as an incentive tool for network extensions.

Keywords: Combined Merchant-Regulatory Mechanism; Electricity Transmission Expansion; Europe (search for similar items in EconPapers)
JEL-codes: G38 L94 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2007-05
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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