Long-term transmission rights and dynamic efficiency

Petropoulos, Georgios;Willems, Bert
(2020) Energy Economics — Vol. 88, p. 104714 (2020)

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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.
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Petropoulos, G., & Willems, B. (2020). Long-term transmission rights and dynamic efficiency. Energy Economics, 88, 104714. https://doi.org/10.1016/j.eneco.2020.104714 (Original work published 2020)