Abstract
We formulate a three-period model for studying how the exercise of local market power by generation firms affects the equilibrium investment between the generation and the transmission sectors. Using a 30-bus network example, we compare the transmission investment decisions made by a network planner (who proactively plans transmission investments to induce a more socially-efficient equilibrium of generation investments) with both those made by an integrated-resources planner (who jointly plans generation and transmission expansions) and those made by a network planner (who plans transmission investments only considering the currently installed generation capacities). We show that, although a proactive network planner cannot do better (in terms of social welfare) than an integrated-resources planner, it can recoup some of the lost welfare due to the separation of generation and transmission planning by proactively expanding transmission capacity. Conversely, a reactive network planner, who ignores the interrelationship between the transmission and the generation investments, foregoes this opportunity.
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