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A Dynamic Incentive Mechanism for Transmission Expansion in Electricity Networks – Theory, Modeling and Application

By Juan Rosellon and Hannes Weigt

Abstract

This paper examines the Hogan-Rosellón-Vogelsang (2007) (HRV) incentive mechanism for transmission expansion, and tests it for different network topologies. This new mechanism is based upon redefining transmission output in terms of point-to-point transactions or financial transmission rights (FTRs) and applies Vogelsang’s (2001) incentive-regulation logic that proposes rebalancing the variable and fixed parts of a two-part tariff to promote efficient, long-term expansion. We analyze three main topics: first, the behavior of cost functions for distinct network topologies; second, the HRV regulatory approach (incorporated into an MPEC Problem and tested for a three-node network), and third an application to a simplified network. The results suggest that the mechanism is generally suited as an incentive tool for network extensions.

Topics: L51 - Economics of Regulation, L91 - Transportation: General, L94 - Electric Utilities, Q40 - General
Year: 2008
DOI identifier: 10.5547/issn0195-6574-ej-vol32-no1-5
OAI identifier: oai:mpra.ub.uni-muenchen.de:22843

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