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

We propose a price-cap mechanism for electricity-transmission expansion based on redefining transmission output in terms of financial transmission rights. Our mechanism applies the incentive-regulation logic of rebalancing a two-part tariff. First, we test this mechanism in a three-node network. We show that the mechanism intertemporally promotes an investment pattern that relieves congestion, increases welfare, augments the Transco´s profits, and induces convergence of prices to marginal costs. We then apply the mechanism to a grid of northwestern Europe and show a gradual convergence toward a common-price benchmark, an increase in total capacity, and convergence toward the welfare optimum.Electricity transmission expansion, incentive regulation

Long-Run Cost Functions for Electricity Transmission

Electricity transmission has become the pivotal industry segment for electricity restructuring. Yet, little is known about the shape of transmission cost functions. Reasons for this can be a lack of consensus about the definition of transmission output and the complexitity of the relationship between optimal grid expansion and output expansion. Knowledge of transmission cost functions could help firms (Transcos) and regulators plan transmission expansion and could help design regulatory incentive mechanisms. We explore transmission cost functions when the transmission output is defined as point-to-point transactions or financial transmission right (FTR) obligations and particularly explore expansion under loop-flows. We test the behavior of FTR-based cost functions for distinct network topologies and find evidence that cost functions defined as FTR outputs are piecewise differentiable and that they contain sections with negative marginal costs. Simulations, however, illustrate that such unusual properties do not stand in the way of applying price-cap incentive mechanisms to real-world transmission expansion.Electricity transmission, cost function, incentive regulation, merchant investment, congestion management

Cournot versus supply functions: what does the data tell us?

The liberalization of the electricity sector increases the need for realistic and robust models of the oligopolistic interaction of electricity firms. This paper compares the two most popular models: Cournot and the Supply Function Equilibrium (SFE), and tests which model describes the observed market data best. Using identical demand and supply specifications, both models are calibrated to the German electricity market by varying the contract cover of firms. Our results show that each model explains an identical fraction of the observed price variation. We therefore suggest using Cournot models for short term analysis, as more market details, such as network constraints, can be accommodated. As the SFE model is less sensitive to the choice of the calibration parameters, it might be more appropriate for long term analysis, such as the study of a merger.supply function equilibrium, Cournot competition, electricity markets

Removing Cross-Border Capacity Bottlenecks in the European Natural Gas Market: A Proposed Merchant-Regulatory Mechanism

We propose a merchant-regulatory framework to promote investment in the European natural gas network infrastructure based on a price cap over two-part tariffs. As suggested by Vogelsang (2001) and Hogan et al. (2010), a profit maximizing network operator facing this regulatory constraint will intertemporally rebalance the variable and fixed part of its two-part tariff so as to expand the congested pipelines, and converge to the Ramsey-Boiteaux equilibrium. We confirm this with actual data from the European natural gas market by comparing the bi-level price-cap model with a base case, a no-regulation case, and a welfare benchmark case, and by performing sensitivity analyses. In all cases, the incentive model is the best decentralized regulatory alternative that efficiently develops the European pipeline system.regulation, transportation network, investment

Investments in a combined energy network model: substitution between natural gas and electricity?

Natural gas plays an important role in the future development of electricity markets as it is the least emission intensive fossil generation option while additionally providing the needed flexibility in plant operation to deal with intermittent renewable generation. As both the electricity and the natural gas market rely on networks, congestion on one market may lead to changes on another. In addition, investments in one market have an impact in the other and may even become substitutes for one another. The objective of this paper is to develop a dynamic model representation of coupled natural gas and electricity network markets to test the potential interaction with respect to investments. The model is tested under simplified conditions as well as for a stylized European network setting. The results indicate that there is a potential for investment-substitution and significant market interactions that warrants the application of coupled models especially with regard to simulations of long term system developments

Sensitivity of energy system investments to policy regulation changes: Application of the blue sky catastrophe

In this paper we argue, that the interaction of technology and economic policy regulations in the energy sector may be described by the so-called slow-fast class of dynamical systems. It is known that such systems may exhibit the blue sky catastrophe, a special type of bifurcation. Application of this result allows us to argue that caution is needed when updating economic policies in the energy sector to avoid the onset of catastrophic developments in the system's transformation, when energy system dynamics becomes unresponsive to policy updates

Linking Europe - The Role of the Swiss Electricity Transmission Grid until 2050

The aim of this paper is to evaluate the role of the Swiss electricity transmission system and the planned network extensions in the context of Central European electricity market developments and thereby the Swiss and European energy transitions. In addition, we conduct a sensitivity analysis of delayed grid investments for Swiss and European network projects, respectively. By deriving a quantification of potential costs and system stability impacts due to delayed network investments, we can identify whether the currently observed lag in many energy investments poses a threat to achieving the envisioned energy transitions

Germany’s Wind Energy: The Potential for Fossil Capacity Replacement and Cost Saving

Wind energy has become the major renewable energy source in Germany with an installed capacity of more than 20 GW and an annual output of about 40 TWh in 2007. In this paper we analyze the extent to which wind energy can replace fossil capacities based on wind injection and demand data for 2006 through June 2008. The results indicate that the wind potential in Germany will not allow a significant reduction of fossil capacities. We also assess the potential savings due to wind energy. The German market is modeled with and without wind input to estimate the net savings of fossil fuels in the observation period. We find that the cost-saving potential for electricity production is quite significant in the study period and exceeds the subsidies

CO2 Abatement from Renewable Energy Injections in the German Electricity Sector: Does a CO2 Price Help?

http://web.mit.edu/ceepr/www/publications/workingpapers.htmlThe overlapping impact of the Emission Trading System (ETS) and renewable energy (RE) deployment targets creates a classic case of interaction effects. Whereas the price interaction is widely recognized and has been thoroughly discussed, the effect of an overlapping instrument on the abatement attributable to an instrument has gained little attention. This paper estimates the actual reduction in demand for European Union Allowances that has occurred due to RE deployment focusing on the German electricity sector, for the five years 2006 through 2010. Based on a unit commitment model we estimate that CO2 emissions from the electricity sector are reduced by 33 to 57 Mtons, or 10% to 16% of what estimated emissions would have been without any RE policy. Furthermore, we find that the abatement attributable to RE injections is greater in the presence of an allowance price than otherwise. The same holds for the ETS effect in presence of RE injection. This interaction effect is consistently positive for the German electricity system, at least for these years, and on the order of 0.5% to 1.5% of emissions