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

See all articles by Juan Rosellon

Juan Rosellon

Centro de Investigacion y Docencia Economicas

Hannes Weigt

WWZ, Wirtschaftswissenschaftliche Fakultät der Universität Basel

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Date Written: 2008

Abstract

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

Suggested Citation

Rosellon, Juan and Weigt, Hannes, A Dynamic Incentive Mechanism for Transmission Expansion in Electricity Networks - Theory, Modeling and Application (2008). Electricity Markets Working Paper No. WP-EM-26, Available at SSRN: https://ssrn.com/abstract=1136773 or http://dx.doi.org/10.2139/ssrn.1136773

Juan Rosellon

Centro de Investigacion y Docencia Economicas ( email )

Carretera Mexico Toluca 3655
01210 Mexico, D.F.
Mexico

Hannes Weigt (Contact Author)

WWZ, Wirtschaftswissenschaftliche Fakultät der Universität Basel ( email )

Basel, 4051
Switzerland

HOME PAGE: http://fonew.unibas.ch/

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