A Dynamic Incentive Mechanism for Transmission Expansion in Electricity Networks: Theory, Modeling, and Application

Posted: 16 Jul 2010

See all articles by Juan Rosellon

Juan Rosellon

Centro de Investigacion y Docencia Economicas

Hannes Weigt

WWZ, Wirtschaftswissenschaftliche Fakultät der Universität Basel

Multiple version iconThere are 2 versions of this paper

Date Written: June 2010

Abstract

We propose a price-cap mechanism for electricity-transmission expansion based on redefining transmission output in terms of financial transmission rights. Our mechanism applies the incentive-regulation logic of rebalancing a two-part tariff. First, we test this mechanism in a three-node network. We show that the mechanism intertemporally promotes an investment pattern that relieves congestion, increases welfare, augments the Transco´s profits, and induces convergence of prices to marginal costs. We then apply the mechanism to a grid of northwestern Europe and show a gradual convergence toward a common-price benchmark, an increase in total capacity, and convergence toward the welfare optimum.

Keywords: Electricity transmission expansion, incentive regulation

JEL Classification: L51, L91, L94, Q40

Suggested Citation

Rosellon, Juan and Weigt, Hannes, A Dynamic Incentive Mechanism for Transmission Expansion in Electricity Networks: Theory, Modeling, and Application (June 2010). DIW Berlin Discussion Paper No. 1019, Available at SSRN: https://ssrn.com/abstract=1639843 or http://dx.doi.org/10.2139/ssrn.1639843

Juan Rosellon (Contact Author)

Centro de Investigacion y Docencia Economicas ( email )

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

Hannes Weigt

WWZ, Wirtschaftswissenschaftliche Fakultät der Universität Basel ( email )

Basel, 4051
Switzerland

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

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