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| Title: | | A dynamic incentive mechanism for transmission expansion in electricity networks: Theory, modeling, and application  |
| Authors: | | Rosellón, Juan Weigt, Hannes |
| Issue Date: | | 2010 |
| Series/Report no.: | | Discussion papers // German Institute for Economic Research 1019 |
| Abstract: | | We propose a price-cap mechanism for electricity-transmission expansion based on redefining transmission output in terms of financial transmission rights. Our mechanism applies the incentive-regulation logic of rebalancing a two-part tariff. First, we test this mechanism in a three-node network. We show that the mechanism intertemporally promotes an investment pattern that relieves congestion, increases welfare, augments the Transco's profits, and induces convergence of prices to marginal costs. We then apply the mechanism to a grid of northwestern Europe and show a gradual convergence toward a common-price benchmark, an increase in total capacity, and convergence toward the welfare optimum. |
| Subjects: | | Electricity transmission expansion incentive regulation |
| JEL: | | L51 L91 L94 Q40 |
| Document Type: | | Working Paper |
| Appears in Collections: | | Publikationen von Forscherinnen und Forschern des DIW DIW-Diskussionspapiere
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