Long-term transmission rights and dynamic efficiency

This external publication was originally published in Science Direct, Elsevier.

Highlights

• Long-term transmission rights (LT-TRs) affect investment incentives of generators.
• Without LT-TRs dominant firms invest too early to preempt entrants.
• With a secondary market for LT-TRs, dominant firms no longer invest too early.
• Both financial and physical LT-TRs have the same beneficial effect.

Abstract

We compare market designs for access regulation of a bottleneck transmission line, and study their impact on investment decisions by an incumbent firm with an existing dirty technology and entrant with an uncertain future low-carbon technology. Nodal pricing, which allocates network access on a short-term competitive basis, distorts investment decisions, as the incumbent preempts the entrant by investing early. Long-term tradable transmission rights restore investment efficiency: the incumbent's investment timing becomes socially optimal. This is the case for financial and physical transmission rights, but it requires the existence of a secondary market for transmission rights.