Working Paper: NBER ID: w9534
Authors: Paul L. Joskow; Jean Tirole
Abstract: We examine the performance attributes of a merchant transmission investment framework that relies on market driven' transmission investment to provide the infrastructure to support competitive wholesale markets for electricity. Under a stringent set of assumptions, the merchant investment model has a remarkable set of attributes that appear to solve the natural monopoly problem traditionally associated with electricity transmission networks. We extend the merchant investment model to incorporate imperfections in wholesale electricity markets, lumpiness in transmission investment opportunities, stochastic attributes of transmission networks and associated property rights definition issues, the effects of behavior of transmission owners and system operators on transmission capacity, maintenance and reliability, coordination and bargaining considerations, forward contract, commitment and asset specificity issues. Incorporating these more realistic attributes of transmission networks and the behavior of transmission owners and system operators undermines the attractive properties of the merchant model and leads to inefficient transmission investment decisions.
Keywords: merchant transmission; electricity markets; investment efficiency
JEL Codes: L9; L5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| market-driven transmission investments (R42) | efficiency of electricity transmission networks (L94) |
| assumptions of market-driven investment (G11) | efficiency of transmission networks (D85) |
| stochastic capacity and behavior of transmission owners (L97) | efficiency of transmission networks (D85) |
| imperfections in wholesale electricity markets (D43) | efficient transmission rights (R48) |
| behavior of transmission owners (L97) | investment efficiency (G31) |
| system operator decisions (C44) | investment efficiency (G14) |