Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/46198
Authors: 
Rosellón, Juan
Weigt, Hannes
Year of Publication: 
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

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