Incentive Mechanisms for Electricity Transmission Expansion
Monday, January 26, 2009
4:15 PM - 5:45 PM (Pacific)
Electricity transmission pricing and transmission grid expansion have received increasing regulatory and analytical attention in recent years. There are two disparate approaches to transmission investment: one employs the theory based on long-run financial rights (LTFTR) to transmission (merchant approach), while the other is based on the incentive-regulation hypothesis (regulatory approach). The transmission firm (Transco) is regulated through benchmark or price regulation to provide long-term investment incentives. In this presentation I consider the elements that could combine the merchant and regulatory approaches in a setting with price-taking electricity generators and loads. A new price-cap incentive mechanism for electricity transmission expansion is proposed based upon redefining transmission output in terms of point-to-point transactions. The mechanism applies the incentive regulatory logic of rebalancing the variable and fixed parts of a two-part tariff to promote efficient, long-term expansion.