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A Merchant Mechanism for Electricity Transmission Expansion

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  • Tarjei Kristiansen
  • Juan Rosellón

Abstract

We propose a merchant mechanism to expand electricity transmission based on long-term financial transmission rights (FTRs). Due to network loop flows, a change in network capacity might imply negative externalities on existing transmission property rights. The system operator thus needs a protocol for awarding incremental FTRs that maximize investors’ preferences, and preserves certain currently unallocated FTRs (or proxy awards) so as to maintain revenue adequacy. In this paper we define a proxy award as the best use of the current network along the same direction as the incremental awards. We then develop a bi-level programming model for allocation of long-term FTRs according to this rule and apply it to different network topologies. We find that simultaneous feasibility for a transmission expansion project crucially depends on the investor-preference and the proxy-preference parameters. Likewise, for a given amount of pre-existing FTRs the larger the current capacity the greater the need to reserve some FTRs for possible negative externalities generated by the expansion changes. Copyright Springer Science+Business Media, Inc. 2006

Suggested Citation

  • Tarjei Kristiansen & Juan Rosellón, 2006. "A Merchant Mechanism for Electricity Transmission Expansion," Journal of Regulatory Economics, Springer, vol. 29(2), pages 167-193, March.
    • Handle: RePEc:kap:regeco:v:29:y:2006:i:2:p:167-193
    DOI: 10.1007/s11149-006-6034-3
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    References listed on IDEAS

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    1. Paul L. Joskow & Richard Schmalensee, 1988. "Markets for Power: An Analysis of Electrical Utility Deregulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262600188, April.
    2. Gilbert, Richard & Neuhoff, Karsten & Newbery, David, 2002. "Mediating Market Power in Electricity Networks," Department of Economics, Working Paper Series qt4sw3h193, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    3. Gilbert, Richard & Neuhoff, Karsten & Newbery, David, 2002. "Mediating Market Power in Electricity Networks," Department of Economics, Working Paper Series qt8zq3z0tj, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
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    More about this item

    Keywords

    Electricity transmission; Financial transmission rights; Merchant transmission expansion; Bi-level programming; Power flow model; L51; L91; L94; Q40;
    All these keywords.

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L91 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Transportation: General
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General

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