Merchant Transmission Investment

We examine the performance attributes of a merchant transmission investment framework that relies on �market driven� transmission investment to provide the infrastructure to support competitive wholesale markets for electricity. Under a stringent set of assumptions, the merchant investment model appears to solve the natural monopoly problem and the associated need for regulating transmission companies traditionally associated with electric transmission networks. We expand the model to incorporate imperfection in wholesale electricity markets, lumpiness in transmission investment opportunities, stochastic attributes of transmission networks and associated property rights definition issues, the effects of the behaviour system operators and transmission owners on transmission capacity and reliability, co-ordination and bargaining considerations, forward contract, commitment and asset specificity issues. This significantly undermines the attractive properties of the merchant investment model. Relying primarily on a market driven investment framework to govern investment is likely to lead to inefficient investment decisions and undermine the performance of competitive markets

The Future of Nuclear Power in the United States: Economic and Regulatory Challenges

This paper examines the economic and regulatory challenges that must be faced by potential investors in new nuclear power plants in the United States. The historical development of the existing fleet of over 100 nuclear plants and their recent performance history are discussed. The pattern of re-licensing of existing plants and the implications for the role of the extended operation of the existing fleet in the overall electricity supply portfolio over the next 50 years is examined. The economic competitiveness of investments in new nuclear power plants compared to investments in alternative base load technologies is discussed under a variety of assumptions about construction costs, fuel costs, competitive and economic regulatory environments and various levels of carbon emissions prices affected competing fossil-fueled technologies. The paper then turns to a discussion of federal government efforts to facilitate investment in new nuclear power plants. These include streamlined licensing procedures and financial incentive provided by the Energy Policy Act of 2005. The regulatory and financial changes make investment in new nuclear power plants significantly more attractive to investors. However, in the longer run a combination of lower and more stable construction costs combined with carbon emissions charges are likely to be necessary to make investments in new nuclear plants significantly more attractive than investments in pulverized coal plants. Unresolved waste disposal policies and local opposition to new nuclear plants are likely to represent barriers to investment in new nuclear power plants in some areas of the country. First mover plants that can benefit from federal financial incentives are most likely to be built in states that continue to regulate generating plants based on cost-of-service principles, transferring construction cost and operating performance risks to consumers, and where there is room on existing sites to build additional nuclear capacity.

Reliability and Competitive Electricity Markets

Deregulation of the electricity sector has resulted in conflict between the economic aims of creating competitive wholesale and retail markets, and an engineering focus on reliability of supply. The paper starts by deriving the optimal prices and investment program when there are price-insensitive retail consumers, and their load serving entities can choose any level of rationing they prefer contingent on real time prices. It then examines the assumptions required for a competitive wholesale and retail market to achieve this optimal price and investment program. The paper analyses the implications of relaxing several of these assumptions. First, it analyses the interrelationships between regulator-imposed price caps, capacity obligations, and system operator procurement, dispatch and compensation arrangements. It goes on to explore the implications of potential network collapses, the concomitant need for operating reserve requirements and whether market prices will provide incentives for investments consistent with these reserve requirements

Retail Electricity Competition

We explore the implications of load profiling of consumers whose traditional meters do not allow for measurement of their real time consumption. We find the competitive equilibrium does not support the Ramsey two-part tariff. By contrast, when consumers are billed on real time prices and consumption, retail competition yields the Ramsey prices even when consumers can only partially respond to variations in real time prices. We then examine the incentive competitive retailers have to install one of two types of advanced metering equipment. Competing retailers overinvest in real time meters compared to the Ramsey optimum, but investment incentives are constrained optimal given load-profiling and retail competition. Finally, we consider the effects of physical limitations on the ability of system operators to cut off individual customers. Competing retailers have no incentive to determine the aggregate value of non-interruption of consumers, preferring instead to free-ride on other retailers serving the same zone

The future of nuclear power in the United States : economic and regulatory challenges

This paper examines the economic and regulatory challenges that must be faced by potential investors in new nuclear power plants in the United States. The historical development of the existing fleet of over 100 nuclear plants and their recent performance history are discussed. The pattern of re-licensing of existing plants and the implications for the role of the extended operation of the existing fleet in the overall electricity supply portfolio over the next 50 years is examined. The economic competitiveness of investments in new nuclear power plants compared to investments in alternative base load technologies is discussed under a variety of assumptions about construction costs, fuel costs, competitive and economic regulatory environments and various levels of carbon emissions prices affected competing fossil-fueled technologies. Federal government efforts to facilitate investment in new nuclear power plants, including streamlined licensing procedures and financial incentive provided by the Energy Policy Act of 2005 are discussed.(cont.) These regulatory changes and financial incentives improve the economic competitiveness of nuclear power. First mover plants that can benefit from federal financial incentives are most likely to be built in states that continue to regulate generating plants based on cost-of-service principles, transferring construction cost and operating performance risks to consumers, and where there is room on existing sites to build additional nuclear capacity. Once federal financial incentives come to an end lower and more stable construction costs combined with carbon emissions charges are likely to be necessary to make investments in new nuclear plants significantly more attractive than investments in pulverized coal plants. Unresolved waste disposal policies and local opposition to new nuclear plants are likely to represent barriers to investment in new nuclear power plants in some areas of the country

Merchant Transmission Investment

We examine the performance attributes of a merchant transmission investment framework that relies on market driven' transmission investment to provide the infrastructure to support competitive wholesale markets for electricity. Under a stringent set of assumptions, the merchant investment model has a remarkable set of attributes that appear to solve the natural monopoly problem traditionally associated with electricity transmission networks. We extend the merchant investment model to incorporate imperfections in wholesale electricity markets, lumpiness in transmission investment opportunities, stochastic attributes of transmission networks and associated property rights definition issues, the effects of behavior of transmission owners and system operators on transmission capacity, maintenance and reliability, coordination and bargaining considerations, forward contract, commitment and asset specificity issues. Incorporating these more realistic attributes of transmission networks and the behavior of transmission owners and system operators undermines the attractive properties of the merchant model and leads to inefficient transmission investment decisions.

Retail Electricity Competition

We analyze a number of unstudied aspects of retail electricity competition. We first explore the implications of load profiling of consumers whose traditional meters do not allow for measurement of their real time consumption, when consumers are homogeneous up to a scaling factor. In general, the combination of retail competition and load profiling does not yield the second best prices given the non price responsiveness of consumers. Specifically, the competitive equilibrium does not support the Ramsey two-part tariff. By contrast, when consumers have real time meters and are billed based on real time prices and consumption, retail competition yields the Ramsey prices even when consumers can only partially respond to variations in real time prices. More complex consumer heterogeneity does not lead to adverse se1ection and competitive screening behavior unless consumers have real time meters and are not rational. We then examine the incentives competitive retailers have to install one of two types of advanced metering equipment. Competing retailers overinvest in real time meters compared to the Ramsey optimum, but the investment incentives are constrained optimal given load-profiling and retail competition. Finally effects of physical limitations on the ability of system operators to cut off individual customers. Competing retailers have no incentive to determine the aggregate value of non-interruption of consumers in the zones they serve instead to free ride on other retailers serving consumers in the same zones.