Abstract
Efficient provision of electricity requires timely expansions of power transmission capacity. However, regulation does not always send the right signals to generate the required (and timely) investments. Therefore, it is important to evaluate the effect of alternative regulations on investment on transmission capacity. In this paper, considering regulated remuneration, we perform this evaluation with a behavioral simulation model of the transmission capacity expansion, in which capacity is endogenously determined by the demand/supply relation. Two planning approaches were considered: centralized planning where the investments are fully coordinated by a central organism, and decentralized planning where the capacity expansions are driven by the investors’ rationality on the power market evolution. The model is applied to the Colombian case. The decentralized approach has lower costs (usage charges) than centralized expansion, but lower transmission capacity margins. As low transmission capacity margins create supply risks in high demand periods, regulators can increase coordination in decentralized planning by directly promoting investments that increase security of supply.
1. Introduction
Electricity markets need timely transmission capacity expansions to maintain the security of supply. Efficient expansion prevents blackouts and shortages that generate price rises, welfare losses for demand and generators, and increases in operating and maintenance (O&M) costs for grid operators. Defining such expansions is a complex task. Under traditional market conditions, the expansion considers technical, economic, and environmental issues, taking into account uncertainty about electricity demand, capital constraints, and environmental impacts, among others [1]. Nowadays, the new role of the transmission in modern electricity markets must consider distributed generation from renewable sources [2,3], and the regional planning in a context of markets integration [4]. Besides, electricity transmission exhibits negative externalities [5,6] and economies of scale [7–9] that complicate the allocation of transmission costs to market players and the estimation of the profitability of investments. As a result, it is possible to face an excess or a lack of investment in transmission capacity [10,11]. These features are crucial when planning and defining mechanisms for capacity expansion in power transmission.
5. Conclusion and policy implications
In this paper, expansion of power transmission capacity is analyzed using a simulation model for centralized and decentralized approaches. Centralized expansion contributes to achieve reliability goals set as a desired transmission capacity margin, but it also requires more timely investment signals to reduce over-investment and usage charges. By contrast, decentralized expansion encourages investment through mechanisms such as usage charges and compensations, but increases compensations because it does not promote excess capacity. Given this complementarity, we also studied a hybrid approach combining the features of centralized and decentralized expansions. This hybrid planning improved investment
