EP 24

Paul Joskow, Jean Tirole

Merchant Transmission Investment

EP 24  | Non-Technical Summary | PDF

Abstract: We examine the performance attributes of a merchant transmission investment framework that relies on ‘market driven’ transmission investment to provide the infrastructure to support
competitive wholesale markets for electricity. Under a stringent set of  assumptions, the merchant investment model appears to solve the natural monopoly problem and the associated need for regulating transmission companies traditionally associated with electric transmission networks. We expand the model to incorporate imperfection in wholesale electricity markets, lumpiness in transmission investment opportunities, stochastic attributes of transmission networks and associated property rights definition issues, the effects of the behaviour system operators and transmission owners on transmission capacity and reliability, co-ordination and bargaining considerations, forward contract, commitment and asset specificity issues. This significantly undermines the attractive properties of the merchant investment model. Relying primarily on a market driven investment framework to govern investment is likely to lead to inefficient investment decisions and undermine the performance of competitive markets.