Transmission and wind investment in a deregulated electricity industry

TY - GEN

T1 - Transmission and wind investment in a deregulated electricity industry

AU - Maurovich-Horvat, Lajos

AU - Boomsma, Trine Krogh

AU - Fleten, Stein-Erik

AU - Siddiqui, Afzal S.

PY - 2013

Y1 - 2013

N2 - The transition to a more sustainable energy system requires investment in renewable energy technologies such as wind. Due to the dispersed nature of sites for wind farms, concomitant expansion of the transmission network is also necessary. While the two objectives could be reconciled within the auspices of a regulated welfare-maximising planner, recent restructuring of electricity industries has introduced a merchant model for transmission investment, which provides congestion rents from construction of a new line. Thus, the merchant investor's incentives are different from those of producers carrying out investment in wind farms. In this paper, we analyse the interaction between the two conflicting objectives under various assumptions about the electricity market structure and the degree of producers' market power. Via a three-node illustrative example, we show that a merchant investor typically builds less transmission capacity than a welfare-maximising transmission system operator or central planner. Although social welfare is lower and nodal prices are generally higher with a merchant investor and when producers are assumed to behave à la Cournot, the effect of lower price response at the dominant demand node is to increase concentration of generation capacity. Hence, the distributional effects of transmission expansion depend on the relative supply-demand balance throughout the network.

AB - The transition to a more sustainable energy system requires investment in renewable energy technologies such as wind. Due to the dispersed nature of sites for wind farms, concomitant expansion of the transmission network is also necessary. While the two objectives could be reconciled within the auspices of a regulated welfare-maximising planner, recent restructuring of electricity industries has introduced a merchant model for transmission investment, which provides congestion rents from construction of a new line. Thus, the merchant investor's incentives are different from those of producers carrying out investment in wind farms. In this paper, we analyse the interaction between the two conflicting objectives under various assumptions about the electricity market structure and the degree of producers' market power. Via a three-node illustrative example, we show that a merchant investor typically builds less transmission capacity than a welfare-maximising transmission system operator or central planner. Although social welfare is lower and nodal prices are generally higher with a merchant investor and when producers are assumed to behave à la Cournot, the effect of lower price response at the dominant demand node is to increase concentration of generation capacity. Hence, the distributional effects of transmission expansion depend on the relative supply-demand balance throughout the network.

U2 - 10.1109/EEM.2013.6607407

DO - 10.1109/EEM.2013.6607407

M3 - Article in proceedings

SN - 978 -1-4799-2008-2

BT - 10th International Conference on the European Energy Market (EEM)),

PB - IEEE

ER -