Long-Run Cost Functions for Electricity Transmission

Electricity Markets Working Papers WP-EM-36

DIW Berlin Discussion Paper No. 1020

Posted: 14 Nov 2009 Last revised: 15 Jul 2010

See all articles by Juan Rosellon

Juan Rosellon

Centro de Investigacion y Docencia Economicas

Ingo Vogelsang

Boston University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Hannes Weigt

WWZ, Wirtschaftswissenschaftliche Fakultät der Universität Basel

Date Written: November 11, 2009

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 complexitity 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, cost function, incentive regulation, merchant investment, congestion management

JEL Classification: L51, L 91, L94, Q4

Suggested Citation

Rosellon, Juan and Vogelsang, Ingo and Weigt, Hannes, Long-Run Cost Functions for Electricity Transmission (November 11, 2009). Electricity Markets Working Papers WP-EM-36, DIW Berlin Discussion Paper No. 1020, Available at SSRN: https://ssrn.com/abstract=1504042 or http://dx.doi.org/10.2139/ssrn.1504042

Juan Rosellon

Centro de Investigacion y Docencia Economicas ( email )

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

Ingo Vogelsang

Boston University - Department of Economics ( email )

270 Bay State Road
Boston, MA 02215
United States

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

Hannes Weigt (Contact Author)

WWZ, Wirtschaftswissenschaftliche Fakultät der Universität Basel ( email )

Basel, 4051
Switzerland

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

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