A Simple Regulatory Incentive Mechanism Applied to Electricity Transmission Pricing and Investment

The informationally simple approach to incentive regulation applies mechanisms that translate the regulator's objective function into the firm's profit-maximizing objective. These mechanisms come in two forms, one based on subsidies/taxes,the other based on constraints/ price caps. In spite of a number of improvements and a good empirical track record simple approaches so far remain imperfect. The current paper comes up with a new proposal, called H-R-G-V, which blends the two traditions and is shown to apply well to electricity transmission pricing and investment. In particular, it induces immediately optimal pricing/investment but is not based on subsidies. In the transmission application, the H-RG- V approach is based on a bilevel optimization with the transmission company (Transco) at the top and the independent system operator (ISO) at the bottom level. We show that HR- G-V, while not perfect, marks an improvement over the other simple mechanisms and a convergence of the two traditions. We suggest ways to deal with remaining practical issues of demand and cost functions changing over time

Regulated Expansion of Electricity Transmission Networks: The Effects of Fluctuating Demand and Wind Generation

We study the performance of different regulatory approaches for the expansion of electricity transmission networks in the light of realistic demand patterns and fluctuating wind power. In particular, we are interested in the relative performance of a combined merchant-regulatory mechanism compared to a cost-based and a merchant-like approach. In contrast to earlier research, we explicitly include both an hourly time resolution and fluctuating wind power, which allows representing demand in a very realistic way. This substantially increases the real-world applicability of results compared to previous analyses, which were based on simplifying assumptions. We show that a combined merchant-regulatory regulation, which draws on a cap over the two-part tariff of the Transco, leads to welfare outcomes far superior to the modeled alternatives. This result proves to be robust over a range of different cases and sensitivity analyses. We also find that the intertemporal rebalancing of the two-part tariff carried out by the Transco so as to expand the network is such that the fixed tariff part turns out to be relatively large compared to extension costs

Transmission Investment in the Peruvian Electricity Market: Theory and Applications

This research presents an application of the Hogan, Rosellón and Vogelsang (2010) (HRV) mechanism to promote electricity transmission network expansion in the Peruvian electricity transmission system known as SEIN (Sistema Eléctrico Interconectado Nacional). The HRV mechanism combines the merchant and regulatory approaches to promote investment into transmission grids. This mechanism gives incentives for efficient investment in expansion of the network by the rebalancing over time of the fixed and variable charges of a two-part tariff in the framework of a wholesale electricity market with locational pricing. The expansion of the network is carried out through the sale of Financial Transmission Rights (FTR's) for the congested lines. The mechanism is applied for 103 nodes of the SEIN using detailed characteristics of generators, nodes and transmission lines. Under Laspeyres weights and linear cost of expansion of transmission capacity, it is shown that prices converge to lower levels as a result of increased transmission capacity

A Profit-Maximizing Approach for Transmission Expansion Planning Using a Revenue-Cap Incentive Mechanism

This paper proposes an incentive mechanism for transmission expansion planning. The mechanism is a bilevel program. The upper level is a profit-maximizing transmission company (Transco) which expands its transmission system while endogenously predicts and influences the generation investment. The lower level is the optimal generation dispatch and investment. The Transco funds its transmission investment costs by collecting merchandising surplus and charging a fixed fee to consumers. The Transco is subject to a revenue cap set by the regulator. This mechanism is formulated as a mixed-integer, quadratically-constrained program (MIQCP) and applied to modified Garver and IEEE 24-node systems. The results of proposed approach have been compared with the welfare-maximum benchmark and cases of Transco with cost-plus regulation and no regulation. In all tested cases, the proposed approach results in welfare-maximum outcomes while the other regulatory approaches fail to produce welfare-maximum outcomes. The profit-maximizing approach has also been successful in cases where transmission investment is driven by demand growth and reactive Transco

Power System Transformation towards Renewables: An Evaluation of Regulatory Approaches for Network Expansion

We analyze various regulatory regimes for electricity transmission investment in the context of a transformation of the power system towards renewable energy. We study distinctive developments of the generation mix with different implications on network congestion, assuming that a shift from conventional power plants towards renewables may go along with exogenous shocks on transmission requirements, which may be either of temporary or permanent nature. We specifically analyze the relative performance of a combined merchant-regulatory price-cap mechanism, a cost-based rule, and a non-regulated approach in dynamic generation settings. Through application in a stylized two-node network, we find that incentive regulation may perform satisfactorily only when appropriate weights are used. While quasi-ideal weights generally restore the beneficial properties that incentive regulatory mechanisms are well-known for in static settings, pure Laspeyres weights may either lead to overinvestment (stranded investments) or delayed investments as compared to the welfare optimum benchmark. Stranded investments could then be avoided through proper handling of weights. Model results indicate that using average Laspeyres-Paasche weights appears to be an appropriate strategy in the context of permanently or temporarily increasing network congestion. Our analysis motivates further research aimed to characterize optimal regulation for transmission expansion in the context of renewable integration

Renewable Integration: The Role of Market Conditions

The 2022 energy crisis highlighted the dependence of Europe electricity sector on imported gas and the need to accelerate the connection of renewables to the power system. However, the allocation of generation and demand in electricity markets is not always technically viable and, where needed, system operators must activate or curtail specific generators not cleared in the day-ahead markets to ensure system reliability. This is a well-known operational, but under-researched, issue related to high integration of renewables. In Spain, most activated units are combined cycle or coal, while an equivalent volume of scheduled renewables (wind) must be curtailed to balance generation and consumption. Most of these actions are not used to alleviate congestion or grid bottlenecks, but to ensure system stability which highlights new challenges, but little empirically analyzed, in efficient integration of renewables. These actions impact on social welfare since all customers bear the costs of these actions, resulting in additional gas imports and CO2 emissions. We estimate how these actions could evolve under different scenarios. We find that additional renewables have increased the costs and CO2 emissions related to network operational needs. Moreover, the installation of small generation behind the meter might become a regressive policy since all customers will bear the additional operational costs. Finally, higher electricity consumption decreases the costs of solving operational needs, which highlights another social welfare benefit associated with the electrification of demand. Until the renewable or storage technologies evolve further, conventional generators (coal, combined cycle or nuclear) are needed for safe operation of systems with high rate of renewables, and countries need to assess when they disconnect them from the network