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

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## 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).

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