A Profit-Maximizing Approach for Transmission Expansion Planning Using a Revenue-Cap Incentive Mechanism

24 Pages Posted: 25 Apr 2015 Last revised: 26 Jul 2018

See all articles by Mohammad Reza Hesamzadeh

Mohammad Reza Hesamzadeh

Royal Institute of Technology (KTH) - Electricity Market Research Group (EMReG)

Juan Rosellon

Centro de Investigacion y Docencia Economicas

Steven Gabriel

Department of Mechanical Engineering and Applied Mathematics, Statistics, and Scientific Computation Program, University of Maryland

Date Written: April 1, 2015

Abstract

This paper proposes an incentive mechanism for transmission expansion planning. The mechanism is a bilevel program. The upper level is a profit-maximizing transmission company (Transco) which expands its transmission system while endogenously predicts and influences the generation investment. The lower level is the optimal generation dispatch and investment. The Transco funds its transmission investment costs by collecting merchandising surplus and charging a fixed fee to consumers. The Transco is subject to a revenue cap set by the regulator. This mechanism is formulated as a mixed-integer, quadratically-constrained program (MIQCP) and applied to modified Garver and IEEE 24-node systems. The results of proposed approach have been compared with the welfare-maximum benchmark and cases of Transco with cost-plus regulation and no regulation. In all tested cases, the proposed approach results in welfare-maximum outcomes while the other regulatory approaches fail to produce welfare-maximum outcomes. The profit-maximizing approach has also been successful in cases where transmission investment is driven by demand growth and reactive Transco.

Keywords: revenue-cap regulation, transmission planning, electricity

JEL Classification: D24, L51, L94

Suggested Citation

Hesamzadeh, Mohammad Reza and Rosellon, Juan and Gabriel, Steven, A Profit-Maximizing Approach for Transmission Expansion Planning Using a Revenue-Cap Incentive Mechanism (April 1, 2015). DIW Berlin Discussion Paper No. 1470, Available at SSRN: https://ssrn.com/abstract=2598416 or http://dx.doi.org/10.2139/ssrn.2598416

Mohammad Reza Hesamzadeh

Royal Institute of Technology (KTH) - Electricity Market Research Group (EMReG) ( email )

Lindstedtsvägen 30-100 44
Stockholm, SE-100 44
Sweden

Juan Rosellon (Contact Author)

Centro de Investigacion y Docencia Economicas ( email )

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

Steven Gabriel

Department of Mechanical Engineering and Applied Mathematics, Statistics, and Scientific Computation Program, University of Maryland ( email )

1143 Glenn L. Martin Hall
College Park, MD 20742-3021
United States

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