Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/46204 
Year of Publication: 
2010
Series/Report no.: 
DIW Discussion Papers No. 1020
Publisher: 
Deutsches Institut für Wirtschaftsforschung (DIW), Berlin
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

Files in This Item:
File
Size
636.32 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.