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Extended Price Cap Mechanism for Efficient Transmission Expansion under Nodal Pricing

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Abstract

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.

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Authors and Affiliations

  1. National Graduate Institute for Policy Studies, 7-22-1 Roppongi, Minato-ku, Tokyo, 106-8677, Japan

    Makoto Tanaka

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  1. Makoto Tanaka
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Correspondence to Makoto Tanaka.

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Tanaka, M. Extended Price Cap Mechanism for Efficient Transmission Expansion under Nodal Pricing. Netw Spat Econ 7, 257–275 (2007). https://doi.org/10.1007/s11067-006-9016-1

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