Towards Optimal Regulation of Transmission Network Investment under Renewable Integration

Abstract

We analyze regulatory regimes for electricity transmission investment in the context of transformation of the power system towards renewable energy. We study three distinctive developments of the generation mix with different implications on network congestion, which may be either of temporary or permanent nature. We address the relative performance of a combined merchant-regulatory price-cap mechanism, a cost-based rule, and a non-regulated approach in these three dynamic generation settings. We find that incentive regulation with Laspeyres weights may lead to overinvestment (stranded investment) as compared to the welfare optimum benchmark. Using Paasche weights leads to acceptable results only in a case of permanent exogenous congestion increase; in contrast, if (quasi) ideal weights are used, it is possible to restore the beneficial properties that incentive regulatory mechanisms are known for in static settings. This analysis motivates further research aimed to characterize optimal regulation for transmission expansion under a transforming renewable-based energy system.