A Dynamic Incentive Mechanism For Transmission Expansion In Electricity Networks ? Theory, Modeling And Application

This paper examines the Hogan-Rosellón-Vogelsang (2007) (HRV) incentive mechanism for transmission expansion, and tests it for different network topologies. This new mechanism is based upon redefining transmission output in terms of point-to-point transactions or Financial Transmission Rights (FTRs) and applies Vogelsang's (2001) incentive-regulation logic that proposes rebalancing the variable and fixed parts of a two-part tariff to promote efficient, long-term expansion. The authors analyze three main topics: first, the behavior of cost functions for distinct network topologies; second, the HRV regulatory approach (incorporated into an MPEC Problem and tested for a three-node network), and third, an application to a simplified network. The results suggest that the mechanism is generally suited as an incentive tool for network extensions.