Extended Price Cap Mechanism for Efficient Transmission Expansion under Nodal Pricing
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This paper examines the regulatory incentive mechanisms for efficient investment in the transmission network under the ISO and Gridco institutional framework. By considering a new element associated with power flow, we develop an extended price cap mechanism that can properly internalize technological externalities among transmission lines. We show that the new mechanism can induce the Gridco to achieve the long-term optimal capacity expansion in the presence of technological externalities, while the ISO continuously promotes efficient capacity utilization in the short run under nodal pricing.
KeywordsNodal pricing Transmission capacity Profit constraint Incentive regulation Price cap
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