Fred Schweppe meets Marcel Boiteux and Antoine-Augustin Cournot: transmission constraints and strategic underinvestment in electric power generation

Léautier, Thomas-Olivier (2013) Fred Schweppe meets Marcel Boiteux and Antoine-Augustin Cournot: transmission constraints and strategic underinvestment in electric power generation. TSE Working Paper, n. 13-432, Toulouse

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Official URL: http://tse-fr.eu/pub/27643

Abstract

This article examines imperfectly competitive investment in electric power generation in the presence of congestion on the transmission grid. Under simple yet realistic assumptions, it precisely derives the technology mix as a function of the capacity of the transmission interconnection. In particular, it finds that, if the interconnection is congested in one direction only, the cumulative capacity is not affected by the congestion, while the baseload capacity is simply the uncongested baseload capacity, weighted by the size of its domestic market, plus the interconnection capacity. If the interconnection is successively congested in both directions, the peaking capacity is the cumulative uncongested capacity, weighted by the size its domestic market, plus the capacity of the interconnection, while the baseload capacity is the solution of a simple first-order condition. The marginal value of interconnection capacity is shown to generalize the expression obtained under perfect competition. It includes both a short-term component, that captures the reduction in marginal cost from substituting cheaper for more expensive power, but also a long-term component, that captures the change in installed capacity. Finally, increasing interconnection is shown to have an ambiguous impact on producers' profits. For example, if the interconnection is congested in one direction only, increasing capacity increases a monopolist profit. On the other hand, if the line is almost not congested, it reduces oligopolists' profits.

Item Type: Monograph (Working Paper)
Language: English
Date: 19 September 2013
Place of Publication: Toulouse
JEL codes: D61 - Allocative Efficiency; Cost-Benefit Analysis
L11 - Production, Pricing, and Market Structure; Size Distribution of Firms
L94 - Electric Utilities
Subjects: B- ECONOMIE ET FINANCE
Divisions: TSE-R (Toulouse), TSM Research (Toulouse)
Institution: Université Toulouse 1 Capitole
Site: UT1
Date Deposited: 09 Jul 2014 17:38
Last Modified: 20 Mar 2018 15:10
OAI ID: oai:tse-fr.eu:27643
URI: http://publications.ut-capitole.fr/id/eprint/15734

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