Juan Rosellón, Wolf-Peter Schill, Jonas Egerer
Growing shares of fluctuating wind power increase the need to expand existing electricity transmission networks. At the same time, the natural monopoly character of transmission networks requires economic regulation of investments. In this article, we study the effects of different regulatory regimes for transmission expansion with a model-based analysis for central Europe. In contrast to previous studies, we explicitly take into account realistic demand patterns and different cases of fluctuating wind power generation. We are particularly interested in the performance of a new combined merchant-regulatory mechanism. We compare its outcomes to a non-regulatory (merchant) approach, cost-based regulation, a welfare-maximizing benchmark, and a case without expansion. While network expansion removes congestion, smoothes electricity prices and increases overall welfare, it might not be attractive for grid owners who benefit from congestion rents. Thus, economic regulation of investments is required. There are two major approaches. The merchant approach employs the theory based on long-term financial transmission rights (cp. Joskow and Tirole, 2005). The performance-based approach relies on incentive regulatory mechanisms for a transmission company (compare Vogelsang 2001, 2006). Hogan et al. (2010) combine these approaches with the Hogan-Rosellón-Vogelsang (HRV) mechansim. It relies on congestion prices - and therefore on financial transmission rights - as well as on price cap regulation. It has already been tested in model-based analyses for simplified grids in North-western Europe (Rosellón and Weigt 2011) and the Northeast USA (Rosellón et al. 2010). In this paper we expand the HRV model so as to incorporate the peculiarities of large-scale RES systems.