Merchant transmission investment

Paul Joskow*, Jean Tirole

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

179 Scopus citations

Abstract

We examine the performance attributes of a merchant transmission investment framework that relies on 'market driven' investment to increase transmission network capacity needed to support competitive wholesale markets for electricity. Under a stringent set of assumptions, the merchant investment model has a remarkable set of attributes that appears to solve the natural monopoly problem and the associated need for regulating electric transmission companies. We expand the merchant model to incorporate several attributes of wholesale power markets and transmission networks that the merchant model ignores. These include market power in wholesale electricity markets, lumpiness in transmission investment opportunities, stochastic attributes of transmission networks and associated property rights definition issues, strategic behavior by potential merchant transmission investors and issues related to the coordination of transmission system operators and merchant transmission owners. Incorporating these more realistic attributes of transmission networks and the behavior of transmission owners and system operators leads to the conclusion that several potentially significant inefficiencies may result from reliance on the merchant transmission investment framework. Accordingly, it is inappropriate for policymakers to assume that they can avoid dealing with the many challenges associated with stimulating efficient levels of investment in electric transmission networks by adopting the merchant model.

Original languageEnglish (US)
Pages (from-to)233-264
Number of pages32
JournalJournal of Industrial Economics
Volume53
Issue number2
DOIs
StatePublished - Jun 2005

ASJC Scopus subject areas

  • Accounting
  • Business, Management and Accounting(all)
  • Economics and Econometrics

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