Incentives for Transmission Investment in the PJM Electricity Market: FTRs or Regulation (or Both?)

Posted: 17 Jul 2010

See all articles by Juan Rosellon

Juan Rosellon

Centro de Investigacion y Docencia Economicas

Zdenka Myslikova

affiliation not provided to SSRN

Eric Zenon

affiliation not provided to SSRN

Date Written: June 2010

Abstract

This paper presents an application of a mechanism that provides incentives to promote transmission network expansion in the area of the US electric system known as PJM. The applied mechanism combines the merchant and regulatory approaches to attract investment into transmission grids. It is based on rebalancing a two-part tariff in the framework of a wholesale electricity market with locational pricing. The expansion of the network is carried out through the sale of financial transmission rights for the congested lines. The mechanism is tested for 14-node and 17-node geographical coverage areas of PJM. Under Laspeyres weights, it is shown that prices converge to the marginal cost of generation, the congestion rent decreases, and the total social welfare increases. The mechanism is shown to adjust prices effectively given either non-peak or peak demand.

Keywords: Electricity transmission expansion, incentive regulation, PJM

JEL Classification: L51, L91, L94, Q40

Suggested Citation

Rosellon, Juan and Myslikova, Zdenka and Zenon, Eric, Incentives for Transmission Investment in the PJM Electricity Market: FTRs or Regulation (or Both?) (June 2010). DIW Berlin Discussion Paper No. 1026, Available at SSRN: https://ssrn.com/abstract=1640546 or http://dx.doi.org/10.2139/ssrn.1640546

Juan Rosellon (Contact Author)

Centro de Investigacion y Docencia Economicas ( email )

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

Zdenka Myslikova

affiliation not provided to SSRN ( email )

Eric Zenon

affiliation not provided to SSRN ( email )

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