A Dynamic Incentive Mechanism for Transmission Expansion in Electricity Networks - Theory, Modeling and Application
Electricity Markets Working Paper No. WP-EM-26
26 Pages Posted: 2 Jun 2008
Date Written: 2008
This paper examines the Hogan-Rosellón-Vogelsang (2007) (HRV) incentive mechanism for transmission expansion, and tests it for different network topologies. This new mechanism is based upon redefining transmission output in terms of point-to-point transactions or financial transmission rights (FTRs) and applies Vogelsang's (2001) incentive-regulation logic that proposes rebalancing the variable and fixed parts of a two-part tariff to promote efficient, long-term expansion. We analyze three main topics: first, the behavior of cost functions for distinct network topologies; second, the HRV regulatory approach (incorporated into an MPEC Problem and tested for a three-node network), and third an application to a simplified network. The results suggest that the mechanism is generally suited as an incentive tool for network extensions.
Keywords: Electricity transmission expansion, incentive regulation, merchant investment, congestion management, Europe
JEL Classification: L51, L 91, L94, Q40
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