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Title:Long-run cost functions for electricity transmission PDF Logo
Authors:Rosellón, Juan
Vogelsang, Ingo
Weigt, Hannes
Issue Date:2010
Series/Report no.:Discussion papers // German Institute for Economic Research 1020
Abstract:Electricity transmission has become the pivotal industry segment for electricity restructuring. Yet, little is known about the shape of transmission cost functions. Reasons for this can be a lack of consensus about the definition of transmission output and the complexitity of the relationship between optimal grid expansion and output expansion. Knowledge of transmission cost functions could help firms (Transcos) and regulators plan transmission expansion and could help design regulatory incentive mechanisms. We explore transmission cost functions when the transmission output is defined as point-to-point transactions or financial transmission right (FTR) obligations and particularly explore expansion under loop-flows. We test the behavior of FTR-based cost functions for distinct network topologies and find evidence that cost functions defined as FTR outputs are piecewise differentiable and that they contain sections with negative marginal costs. Simulations, however, illustrate that such unusual properties do not stand in the way of applying price-cap incentive mechanisms to real-world transmission expansion.
Subjects:Electricity transmission
cost function
incentive regulation
merchant investment
congestion management
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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