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A Merchant Mechanism for Electricity Transmission Expansion

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Abstract

We propose a merchant mechanism to expand electricity transmission based on long-term financial transmission rights (FTRs). Due to network loop flows, a change in network capacity might imply negative externalities on existing transmission property rights. The system operator thus needs a protocol for awarding incremental FTRs that maximize investors’ preferences, and preserves certain currently unallocated FTRs (or proxy awards) so as to maintain revenue adequacy. In this paper we define a proxy award as the best use of the current network along the same direction as the incremental awards. We then develop a bi-level programming model for allocation of long-term FTRs according to this rule and apply it to different network topologies. We find that simultaneous feasibility for a transmission expansion project crucially depends on the investor-preference and the proxy-preference parameters. Likewise, for a given amount of pre-existing FTRs the larger the current capacity the greater the need to reserve some FTRs for possible negative externalities generated by the expansion changes.

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Authors and Affiliations

  1. KEMA Consulting Kurt-Schumacher Strasse 8, D-53113, Bonn, Germany

    Tarjei Kristiansen

  2. División de Economía, Centro de Investigación y Docencia Económicas (CIDE), Carretera México-Toluca 3655, Lomas de Santa Fé, 01210, México, D.F., Mexico

    Juan Rosellón

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  1. Tarjei Kristiansen
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  2. Juan Rosellón
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Correspondence to Tarjei Kristiansen.

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Kristiansen, T., Rosellón, J. A Merchant Mechanism for Electricity Transmission Expansion. J Regul Econ 29, 167–193 (2006). https://doi.org/10.1007/s11149-006-6034-3

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