# Testing regulatory regimes for power transmission expansion with fluctuating demand and wind generation

- 460 Downloads
- 10 Citations

## Abstract

Adequate extension of electricity transmission networks is required for integrating fluctuating renewable energy sources, such as wind power, into electricity systems. We study the performance of different regulatory approaches for network expansion in the context of realistic demand patterns and fluctuating wind power. In particular, we are interested in the relative performance of a combined merchant-regulatory price-cap mechanism compared to a cost-based and a non-regulated approach. We include both an hourly time resolution and fluctuating wind power. This substantially increases the real-world applicability of results compared to previous analyses. We show that a combined merchant-regulatory regulation, which draws upon a cap over the two-part tariff of the transmission company, leads to welfare outcomes superior to the other modeled alternatives. This result proves to be robust over a range of different cases, including such with large amounts of fluctuating wind power. We also evaluate the outcomes of our detailed model using the extension plans resulting from a simplified model based on average levels of load and wind power. We show that this distorts the relative performance of the different regulatory approaches.

## Keywords

Electricity transmission Incentive regulation Renewable integration Europe## JEL Classification

L50 L94 Q40## Notes

### Acknowledgments

The authors thank two anonymous referees, Jean-Michel Glachant, Bill Hogan, Thomas-Olivier Léautier, Christian von Hirschhausen, as well as the participants of the IDEI-Toulouse Conference 2011 and the IAEE International Conference 2011 for helpful comments. We also thank Özge Özdemir of ECN for providing us with network data. Juan Rosellón acknowledges support from a Marie Curie International Incoming Fellowship within the \(7\mathrm{th}\) European Community Framework Programme, as well as from Conacyt (p. 131175).

## References

- 50Hertz Transmission, Amprion, TenneT TSO, TransnetBW (2012). Netzentwicklungsplan Strom 2012, 15 August 2012. http://www.netzentwicklungsplan.de/en. Accessed August 2014
- Armstrong, M., Cowan, S., & Vickers, J. (1994).
*Regulatory reform: Economic analysis and British experience*. Cambridge: MIT Press.Google Scholar - Birge, J. R. (1982). The value of the stochastic solution in stochastic linear programs with fixed recourse.
*Mathematical Programming*,*24*, 314–325.CrossRefGoogle Scholar - Boffa, F., Pingali, V., & Vannoni, D. (2010). Increasing market interconnection: An analysis of the Italian electricity spot market.
*International Journal of Industrial Organization*,*28*(3), 311–322.CrossRefGoogle Scholar - BP (2010). BP Statistical Review of World Energy. London, June 2010.Google Scholar
- Bushnell, J. B., & Stoft, S. E. (1997). Improving private incentives for electric grid investment.
*Resource and Energy Economics*,*19*, 85–108.CrossRefGoogle Scholar - Crew, M. A., Fernando, C. S., & Kleindorfer, P. R. (1995). The theory of peak-load pricing: A survey.
*Journal of Regulatory Economics*,*8*, 215–248.CrossRefGoogle Scholar - EEX (2010). European emission allowances. European energy exchange. http://www.eex.com/en/market-data/emission-allowances/spot-market . Accessed August 2014.
- ENTSO-E (2010a). Net generating capacity on December 31st (in MW). https://www.entsoe.eu/db-query/miscellaneous/net-generating-capacity. Accessed August 2014.
- ENTSO-E (2010b). Hourly load values for a specific country for a specific month (in MW). https://www.entsoe.eu/db-query/consumption/mhlv-a-specific-country-for-a-specific-month. Accessed August 2014.
- Facchinei, F., & Pang, J.-S. (2003).
*Finite-dimensional variational inequalities and complementarity problems*. New York: Springer.Google Scholar - Egerer J., Rosellón J., & Schill, W.-P. (2015). Power system transformation toward renewables: An evaluation of regulatory approaches for network expansion.
*The Energy Journal*(forth coming).Google Scholar - Egerer, J., & Schill, W.-P. (2014). Power system transformation toward renewables: Investment scenarios for Germany.
*Economics of Energy & Environmental Policy*,*3*(2), 33–47.CrossRefGoogle Scholar - Eurostat (2010). Infrastructure-electricity-annual data. http://appsso.eurostat.ec.europa.eu/nui/show.do?dataset=nrg_113a&lang=en. Accessed August 2014.
- Gabriel, S. A., Conejo, A. J., Fuller, J. D., Hobbs, B. F., & Ruiz, C. (2013).
*Complementarity modeling in energy markets*. New York: Springer.CrossRefGoogle Scholar - Grande, O.S., & Wangesteen I. (2000). Alternative models for congestion management and pricing impact on network planning and physical operation. In
*CIGRE*, Paris, August/September, pp. 37–203.Google Scholar - Hobbs, B. F., Metzler, C. B., & Pang, J. S. (2000). Strategic gaming analysis for electric power systems: An MPEC approach.
*IEEE Transactions on Power Systems*,*15*(2), 638–645.CrossRefGoogle Scholar - Hogan, W., Rosellón, J., & Vogelsang, I. (2010). Toward a combined merchant-regulatory mechanism for electricity transmission expansion.
*Journal of Regulatory Economics*,*38*(2), 113–143.CrossRefGoogle Scholar - IEA (2010).
*Projected costs of generating electricity*. Paris: International Energy Agency.Google Scholar - Jordanger J., & Grønli H. (2000). Deregulation of the electricity supply industry—Norwegian experience 1991–2000. The Foundation for Scientific and Industrial Research at the Norwegian Institute of Technology (SINTEF), Norway, http://www.energy.sintef.no/publ/rapport/00/tr5285.htm. Accessed August 2014.
- Joskow, P., & Tirole, J. (2005). Merchant transmission investment.
*Journal of Industrial Economics*,*53*(2), 233–64.CrossRefGoogle Scholar - Kristiansen, T., & Rosellón, J. (2006). A merchant mechanism for electricity transmission expansion.
*Journal of Regulatory Economics*,*29*(2), 167–93.CrossRefGoogle Scholar - Kristiansen, T., & Rosellón, J. (2010). Merchant electricity transmission expansion: A European case study.
*Energy*,*35*(10), 4107–4115.Google Scholar - Léautier, T.-O. (2000). Regulation of an electric power transmission company.
*The Energy Journal*,*21*, 61–92.CrossRefGoogle Scholar - Léautier, T.-O., & Thelen, V. (2009). Optimal expansion of the power transmission grid: Why not?
*Journal of Regulatory Economics*,*36*(2), 127–153.CrossRefGoogle Scholar - Leuthold, F. U., Weigt, H., & von Hirschhausen, C.V. (2012). A large-scale spatial optimization model of the european electricity market.
*Networks and Spatial Economics*,*12*(1), 75–107.Google Scholar - Munoz, F. D., Sauma, E. E., & Hobbs, B. F. (2013). Approximations in power transmission planning: implications for the cost and performance of renewable portfolio standards.
*Journal of Regulatory Economics*,*43*(3), 305–338.CrossRefGoogle Scholar - Neuhoff, K., Barquin, J., Boots, M. G., Ehrenmann, A., Hobbs, B. F., Rijkers, F. A. M., et al. (2005). Network-constrained cournot models of liberalized electricity markets: The devil is in the details.
*Energy Economics*,*27*, 495–525.CrossRefGoogle Scholar - Rosellón, J., & Kristiansen, T. (2013).
*Financial transmission rights: Analysis, experiences and prospects*. Lecture Notes in Energy (Vol. 7), New York: Springer, ISBN: 978-1-4471-4786-2.Google Scholar - Rosellón, J., Myslíková, Z., & Zenón, E. (2011). Incentives for transmission investment in the PJM electricity market: FTRs or regulation (or both?).
*Utilities Policy*,*19*(1), 3–13.CrossRefGoogle Scholar - Rosellón, J., Vogelsang, I., & Weigt, H. (2012). Long-run cost functions for electricity transmission.
*The Energy Journal*,*33*(1), 131–160.CrossRefGoogle Scholar - Rosellón, J., & Weigt, H. (2011). A dynamic incentive mechanism for transmission expansion in electricity networks—Theory, modeling and application.
*The Energy Journal*,*32*(1), 119–148.CrossRefGoogle Scholar - Ruíz, E., & Rosellón, J. (2012). Transmission investment in the Peruvian electricity market: Theory and applications.
*Energy Policy*,*47*, 238–245.CrossRefGoogle Scholar - Sauma, E. E., & Oren, S. S. (2006). Proactive planning and valuation of transmission investments in restructured electricity markets.
*Journal of Regulatory Economics*,*30*, 261–290.CrossRefGoogle Scholar - Schweppe, F. C., Caramanis, M. C., Tabors, R. D., & Bohn, R. E. (1988).
*Spot pricing of electricity*. Boston: Kluwer Academic Publishers.CrossRefGoogle Scholar - Schill, W.-P. (2014). Residual load, renewable surplus generation and storage requirements in Germany.
*Energy Policy*,*73*, 65–79.CrossRefGoogle Scholar - Tanaka, M. (2007). Extended price cap mechanism for efficient transmission expansion under nodal pricing.
*Network and Spatial Economics*,*7*(3), 257–275.CrossRefGoogle Scholar - Vogelsang, I. (2001). Price regulation for independent transmission companies.
*Journal of Regulatory Economics*,*20*(2), 141–65.CrossRefGoogle Scholar - Vogelsang, I. (2006). Electricity transmission pricing and performance-based regulation.
*The Energy Journal*,*27*(4), 97–126.CrossRefGoogle Scholar - Wu, F., Varaiya, P., Spiller, P., & Oren, S. (1996). Folk theorems on transmission access: Proofs and counterexamples.
*Journal of Regulatory Economics*,*10*(1), 5–23.CrossRefGoogle Scholar