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Merchant transmission in single-price electricity markets with cost-based redispatch

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  • Staudt, Philipp
  • Oren, Shmuel S.

Abstract

Transmission expansion is a complex problem in energy market design and research has not yet provided a market-based solution that is superior to a (partly) regulated approach. Furthermore, markets with a single market clearing price lack regional incentives for system friendly generation or transmission capacity expansion. In this paper, we propose a market design for transmission expansion that can be implemented in single-price markets with cost-based redispatch and we describe its properties. We show that our market solution is incentive compatible, satisfies the ’beneficiary pays’ requirement and leads to a welfare optimal grid expansion otherwise achieved by an integrated optimization approach of a benevolent grid operator. We apply the mechanism to the German electricity system in 2018, 2019 and 2030 as an example and show that transmission capacity expansion is greatly reduced using the mechanism instead of a no-congestion regulation. We also test the robustness of the approach to erroneous generation capacity expectations and find that the impact on economic results is limited. Finally, we extend our approach to include congestion reducing generation capacity investment and discuss the strategic effects on a 6-node reference grid.

Suggested Citation

  • Staudt, Philipp & Oren, Shmuel S., 2021. "Merchant transmission in single-price electricity markets with cost-based redispatch," Energy Economics, Elsevier, vol. 104(C).
    • Handle: RePEc:eee:eneeco:v:104:y:2021:i:c:s014098832100476x
    DOI: 10.1016/j.eneco.2021.105610
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    References listed on IDEAS

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    Cited by:

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    2. Davi-Arderius, D. & Jamasb, T. & Rosellon, J., 2024. "Renewable Integration: The Role of Market Conditions," Cambridge Working Papers in Economics 2421, Faculty of Economics, University of Cambridge.
    3. Henni, Sarah & Schäffer, Michael & Fischer, Peter & Weinhardt, Christof & Staudt, Philipp, 2023. "Bottom-up system modeling of battery storage requirements for integrated renewable energy systems," Applied Energy, Elsevier, vol. 333(C).

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    More about this item

    Keywords

    Transmission expansion; Electricity markets; Merchant transmission investment; Single-price mechanism; Cost-based redispatch; Transmission grid congestion;
    All these keywords.

    JEL classification:

    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • P18 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Energy; Environment
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design

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