98/00412 The role of electricity in sustainable development

• Publisher: Elsevier Science
• Year: 1998
• Weight: 219 KB
• Volume: 39
• Category: Article
• ISSN: 0140-6701
• DOI: 10.1016/s0140-6701(97)85674-3

✦ Synopsis

Passive transmission rights such as transmission congestion contracts (TCCs) that are compensated ex-post based on nodal prices resulting from optimal dispatch by an independent system operator (ISO) will be preempted by the strategic bidding of the generators. Even when generation is competitive, rational expectations of congestion will thus induce implicit collusion enabling generators to raise their bids above marginal costs and capture the congestion rents, leaving the TCCs uncompensated. These conclusions are based on a Cournot model of competition across congested transmission links where an IS0 dispatches generators optimally based on bid prices. The Cournot equilibrium in congested electricity networks is characterized with two and three nodes. Absent active transmission rights trading may mean the resulting equilibrium may be at an inefficient dispatch and congestion rents will be captured by the generators. It is also demonstrated how trading of transmission rights in parallel with a competitive energy market can prevent the price distortion and inefficient dispatch associated with passive transmission rights.