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A simple regulatory incentive mechanism applied to electricity transmission pricing and investment
KTH. (Electricity Market Research Group (EMReG))
2018 (English)In: Energy Economics, ISSN 0140-9883, E-ISSN 1873-6181, Vol. 75, p. 423-439Article in journal (Refereed) Published
Abstract [en]

The informationally simple approach to incentive regulation applies mechanisms that translate the regulator's objective function into the firm's profit-maximizing objective. These mechanisms come in two forms, one based on subsidies/taxes, the other based on constraints/price caps. In spite of a number of improvements and a good empirical track record simple approaches so far remain imperfect. The current paper comes up with a new proposal, called H-R-G-V, which blends the two traditions and is shown in simulations to apply well to electricity transmission pricing and investment. In particular, it induces immediately optimal pricing/investment but is not based on subsidies. In the transmission application, the H-R-G-V approach is based on a bilevel optimization with the transmission company (Transco) at the top and the independent system operator (ISO) at the bottom level. We show that H-R-G-V, while not perfect, marks an improvement over the other simple mechanisms and a convergence of the two traditions. We suggest ways to deal with remaining practical issues of demand and cost functions changing over time. 

Place, publisher, year, edition, pages
Elsevier B.V. , 2018. Vol. 75, p. 423-439
Keywords [en]
Bilevel program, Incentive regulation, Transmission investment, Cost functions, Costs, Electric utilities, Investments, Bi-level optimization, Bilevel programs, Demand and cost functions, Electricity transmission, Incentive regulations, Independent system operators, Transmission company (TRANSCO), Transmission investments, Economics, electricity supply, incentive, investment, optimization, pricing policy, regulatory approach
National Category
Economics and Business
Identifiers
URN: urn:nbn:se:kth:diva-236731DOI: 10.1016/j.eneco.2018.08.033ISI: 000449891600033Scopus ID: 2-s2.0-85053842506OAI: oai:DiVA.org:kth-236731DiVA, id: diva2:1257872
Note

Export Date: 22 October 2018; Article; CODEN: EECOD; Correspondence Address: Hesamzadeh, M.R.; Electricity Market Research Group (EMReG), KTH Royal Institute of TechnologySweden; email: mrhesamzadeh@ee.kth.se; Funding details: 232743; Funding text: The authors would like to thank Dina Khastieva for her help in numerical results of this paper. Juan Rosellón acknowledges support from a Conacyt-Sener-FSE grant no. 232743 . QC 20181023

Available from: 2018-10-23 Created: 2018-10-23 Last updated: 2018-12-07Bibliographically approved

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Hesamzadeh, Mohammad Reza

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