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

Rosellon, Juan and Weigt, Hannes (2008): A Dynamic Incentive Mechanism for Transmission Expansion in Electricity Networks – Theory, Modeling and Application.

Abstract

This paper examines the Hogan-Rosellón-Vogelsang (2007) (HRV) incentive mechanism for transmission expansion, and tests it for different network topologies. This new mechanism is based upon redefining transmission output in terms of point-to-point transactions or financial transmission rights (FTRs) and applies Vogelsang’s (2001) incentive-regulation logic that proposes rebalancing the variable and fixed parts of a two-part tariff to promote efficient, long-term expansion. We analyze three main topics: first, the behavior of cost functions for distinct network topologies; second, the HRV regulatory approach (incorporated into an MPEC Problem and tested for a three-node network), and third an application to a simplified network. The results suggest that the mechanism is generally suited as an incentive tool for network extensions.

• Item Type: MPRA Paper
• Language: English
• Keywords: Electricity transmission expansion, incentive regulation, merchant investment,congestion management,Europe
• 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

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