Extended Price Cap Mechanism for Efficient Transmission Expansion under Nodal Pricing
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
Unable to display preview. Download preview PDF.
- Armstrong M, Cowan S, Vickers J (1994) Regulatory reform: economic analysis and British experience. MIT Press, Cambridge, MAGoogle Scholar
- Baumol WJ, Bradford D (1970) Optimal departures from marginal cost pricing. Am Econ Rev 60:265–283Google Scholar
- Hogan WW (2003) Transmission market design. KSG Working Paper RWP03-040Google Scholar
- Hunt S (2002) Making competition work in electricity. Wiley, New YorkGoogle Scholar
- Laffont J-J, Tirole J (1993) A theory of incentives in procurement and regulation. MIT Press, Cambridge, MAGoogle Scholar
- Léautier T-O (2000) Regulation of an electric power transmission company. Energy J 21(4):61–92Google Scholar
- Littlechild SC (1983) Regulation of British telecommunications profitability. HMSO, LondonGoogle Scholar
- Luenberger DG (1973) Introduction to linear and nonlinear programming. Addison-Wesley, Reading, MAGoogle Scholar
- Rosellón J (2003) Different approaches towards electricity transmission expansion. Rev Netw Econ 2(3):238–269Google Scholar
- Schweppe FC, Caramanis MC, Tabors RD, Bohn RE (1988) Spot pricing of electricity. Kluwer, Norwell, MAGoogle Scholar
- Sydsaeter K, Hammond PJ (1995) Mathematics for economic analysis. Prentice Hall, New JerseyGoogle Scholar