Abstract
Adoption of dispersed renewable energy technologies requires transmission network expansion. Besides the transmission system operator (TSO), restructuring of electricity industries has introduced a merchant investor (MI), who earns congestion rents from constructing new lines. We compare these two market designs via a stochastic bi-level programming model that has either the MI or the TSO making transmission investment decisions at the upper level and power producers determining generation investment and operation at the lower level while facing wind power variability. We find that social welfare is always higher under the TSO because the MI has incentive to boost congestion rents by restricting capacities of transmission lines. Such strategic behavior also limits investment in wind power by producers. However, regardless of the market design (MI or TSO), when producers behave à la Cournot, a higher proportion of energy is produced by wind. In effect, withholding of generation capacity by producers prompts more transmission investment since the TSO aims to increase welfare by subsidizing wind and the MI creates more flow to maximize profit.
Highlights
We find that social welfare is always higher under the transmission system operator (TSO) because the merchant investor (MI) has incentive to boost congestion rents by restricting capacities of transmission lines
We aim to gain policy insights into market design by analyzing transmission and wind investment by distinct agents reflecting strategic behavior: at the upper level, we posit that a TSO or an MI invests in new transmission lines, while at the lower level, profit-maximizing conventional and wind producers make investment and operational decisions with transmission flows governed by the relevant grid owner
We demonstrate how market design and market power interact to result in seemingly counterintuitive outcomes
Summary
As the functions of the industry such as generation, distribution, and retailing could be handled together by an investor-owned utility (IOU) with transmission planning and reliability under the auspices of a system operator, there was little incentive to develop new technologies for the market when profits were regulated. A plethora of post-restructuring market designs have emerged [2], they have generally required incumbent IOUs to divest their generation assets with transmission and distribution remaining regulated. These reforms have introduced endogenous price formation and imperfect competition, which necessitate a strategic view of decision making [3]. Market-driven transmission investment has been proposed by the US FERC's July 2002 Standard Market Design (SMD) and the EU's Regulation EC 1228/2003 [4]
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