Long-run Cost Functions for Electricity Transmission

Juan Rosellon, Ingo Vogelsang and Hannes Weigt

No DTE 465, Working Papers from CIDE, División de Economía

Abstract: Electricity transmission has become the pivotal industry segment for electricity restructuring. Yet, little is known about the shape of transmission cost functions. Reasons for this can be a lack of consensus about the definition of transmission output and the complexity of the relationship between optimal grid expansion and output expansion. Knowledge of transmission cost functions could help firms (Transcos) and regulators plan transmission expansion and could help design regulatory incentive mechanisms. We explore transmission cost functions when the transmission output is defined as point-to-point transactions or financial transmission right (FTR) obligations and particularly explore expansion under loop-flows. We test the behavior of FTR-based cost functions for distinct network topologies and find evidence that cost functions defined as FTR outputs are piecewise differentiable and that they contain sections with negative marginal costs. Simulations, however, illustrate that such unusual properties do not stand in the way of applying price-cap incentive mechanisms to real-world transmission expansion.

Keywords: Electricity Transmission; transmission cost functions; loop-flows; FTR-based cost functions. (search for similar items in EconPapers)
JEL-codes: D23 L94 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2009-11
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http://www.economiamexicana.cide.edu/RePEc/emc/pdf/DTE/DTE465.pdf (application/pdf)

Related works:
Journal Article: Long-run Cost Functions for Electricity Transmission (2012)
Journal Article: Long-run Cost Functions for Electricity Transmission (2011)
Working Paper: Long-Run Cost Functions for Electricity Transmission (2010)
Working Paper: Long-run Cost Functions for Electricity Transmission (2009)
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