Rosellón, Juan and Vogelsang, Ingo and Weigt, Hannes (2009): Long-run Cost Functions for Electricity Transmission.
Download (1MB) | Preview
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.
|Item Type:||MPRA Paper|
|Original Title:||Long-run Cost Functions for Electricity Transmission|
|Keywords:||Electricity transmission, cost function, incentive regulation, merchant investment,congestion management|
|Subjects:||L - Industrial Organization > L5 - Regulation and Industrial Policy > L51 - Economics of Regulation
L - Industrial Organization > L9 - Industry Studies: Transportation and Utilities > L91 - Transportation: General
L - Industrial Organization > L9 - Industry Studies: Transportation and Utilities > L94 - Electric Utilities
Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q4 - Energy > Q40 - General
|Depositing User:||Juan Rosellon|
|Date Deposited:||21. May 2010 19:27|
|Last Modified:||13. Feb 2013 07:34|
Bushnell, J. B., and S. E. Stoft (1996), “Electric Grid Investment under a Contract Network Regime, Journal of Regulatory Economics 10, pp. 61-79.
Bushnell, J. B., and S. E. Stoft (1997), “Improving Private Incentives for Electric Grid Investment,” Resource and Energy Economics, 19, 85-108.
Chao, H.P., and S. Peck (1996), “”A Market Mechanism for Electric Power Transmission,” Journal of Regulatory Economics 10, pp. 25-59.
Dismukes, D, E., R. F. Cope III and D. Mesyanzhinov (1999), “Capacity and Economies of Scale in Electric Power Transmission” Utilities Policy, 7, pp. 155-162.
Gasmi, F., D.M. Kennet, J.-J. Laffont and W.W. Sharkey (2002), Cost Proxy Models and Telecommunications Policy, Cambridge, Mass., and London: MIT Press.
Green, R. (2003), “Cost recovery and the efficient development of the grid,” in F. Lévêque (ed.), Transport Pricing of Electricity Networks, Boston: Kluwer, pp. 137-154.
Hogan, W. (2000), “Flowgate Rights and Wrongs” Mimeo, JFK School of Government, Harvard Electricity Policy Group, Harvard University, http://www.ksg.harvard.edu/people/whogan.
Hogan, W. (1992) “Contract Networks for Electric Power Transmission,” Journal of Regulatory Economics, 4, pp. 211-242.
Hogan, W. (2002a), “Financial Transmission Right Incentives: Applications Beyond Hedging” Presentation to HEPG Twenty-Eighth Plenary Session, May 31, http://www.ksg.harvard.edu/people/whogan.
Hogan, W. (2002b), “Financial Transmission Right Formulations” Mimeo, JFK School of Government, Harvard Electricity Policy Group, Harvard University, http://www.ksg.harvard.edu/people/whogan.
Hogan, W., J. Rosellón and I. Vogelsang (2007), “Toward a Combined Merchant-Regulatory Mechanism for Electricity Transmission Expansion” Conference Proceedings, 9th IAEE European Energy Conference, Florence, Italy.
Joskow, P. and J. Tirole (2000) “Transmission Rights and Market Power on Electric Power Networks,” RAND Journal of Economics 31, pp. 450-487.
Joskow, P. and J. Tirole (2005) “Merchant Transmission Investment,” The Journal of Industrial Economics 53, pp. 233-264.
Kristiansen, T., Rosellón, J., 2006. “A Merchant Mechanism for Electricity Transmission Expansion” Journal of Regulatory Economics, 29, pp. 167-193.
Laffont, J.J., and J. Tirole (1996), “Creating Competition Through Interconnections: Theory and Practice” Journal of Regulatory Economics, 10, pp. 227-256.
Léautier, T.-O. (2000) “Regulation of an Electric Power Transmission Company” The Energy Journal, 21, pp. 61-92.
Oren, S., P. Spiller, P. Varaya, and F. Wu (1995), Nodal Prices and Transmission Rights: A Critical Appraisal, Electricity Journal 8, pp. 24-35.
Pérez-Arriaga, J. I., F. J. Rubio and J. F. Puerta Gutiérrez, J. Arceluz, and J. Marin (1995) “Marginal Pricing of Transmission Services: An Analysis of Cost Recovery,” IEEE Transactions on Power Systems, vol. 10, no. 1, pp. 546-553.
Ramírez, J. C. and J. Rosellón (2002), “Pricing Natural Gas Distribution in Mexico” Energy Economics, 24, pp. 231-248.
Rosellón, J. (2007), “A Regulatory Mechanism for Electricity Transmission in Mexico” Energy Policy, 35, pp. 3003-3014.
Rosellón, J. and H. Weigt (2007), “A Combined Merchant-Regulatory Mechanism for Electricity Transmission in Europe” paper presented at the Trans-Atlantic INFRADAY Conference on Applied Infrastructure Modeling and Policy Analysis, University of Maryland, College Park, November 2, 2007.
Rubio-Oldériz, J., and I. J. Pérez-Arriaga (2000) “Marginal Pricing of Transmission Services: A Comparative Analysis of Network Cost Allocation Methods,” IEEE Transactions on Power Systems 15, pp.448-454.
Schweppe, Fred C., Caramanis, Michael C., Tabors, Richard D., and Roger E. Bohn (1988): Spot Pricing Of Electricity. Boston, Kluwer.
Stigler, Heinz, and Christian Todem (2005): “Optimization of the Austrian Electricity Sector (Control Zone of VERBUND APG) under the Constraints of Network Capacities by Nodal Pricing” Central European Journal of Operations Research, 13, pp. 105-125.
Tanaka, M. (2007), “Extended Price Cap Mechanism for Efficient Transmission Expansion under Nodal Pricing” Network and Spatial Economics, 7, pp. 257-275.
Vogelsang, I. (2001), “Price Regulation for Independent Transmission Companies” Journal of Regulatory Economics, 20, pp. 141-65.
Vogelsang, I. (2006), “Electricity Transmission Pricing and Performance-based Regulation” Energy Journal, 27, pp. 97-126.
Wu, F., P. Varaya, P. Spiller, and S. Oren (1996), “Folk Theorems on Transmission Access: Proofs and Counterexamples,” Journal of Regulatory Economics 10, pp. 5-23.