On The Regulation And Competition Of Electricity Transmission Expansion

Since 1980s, various reforms in electricity sector have been gradually taking place all over the world, with the aim of marketization and liberalization. These reforms, on one hand, have yielded positive achievements. On the other hand, transmission underinvestment has increasingly become an obstacle to further reforms. Because the regulators didn't adequately realize the particularity and complexity of transmission regulation in the liberalization markets, few incentives to expand transmission networks has been presented. As a result, it has caused some negative effects, such as electricity shortage, frequent blackouts, or even electricity crisis in some cases. Inadequacy of transmission capacity constrains electricity sector development. Therefore, great emphasis has been placed on how to efficiently expand the transmission networks in recent electricity reforms.This paper primarily investigates the transmission expansion in electricity market, and tries to figure out the following questions :(1) why transmission underinvestment has been taking place in electricity markets;(2) how to incentive the regulated transmission expansion;(3) whether and how the merchant transmission investment can be introduced beyond the regulated one;(4) what the typical experiences of foreign transmission expansions are.On the basis of a thorough analysis of the particular physical properties of electricity network, detailed approaches on how to efficiently expand the transmission network are presented in this paper, using the theories of regulatory, network economics and the methods of combinations of mathematical and positive ,theoretic and case study in the economics framework .We find that one of the important factors of inadequacy of transmission capacity is that the transmission externalities caused by power loop, and transmission pricing approaches based on nodal pricing can embody the externalities of network well.Based on the nodal pricing model, the paper analyses the optimal conditions of transmission expansion in different situations. The following conclusions are drawn:(l)the social optimal condition of transmission expansion is its marginal value equals marginal cost of every new expansion line;(2) the capacity of Transco's transmission expansion will less than the social optimal capacity if Transco with hard budget constraints are not be subsided. At the same time, we give an appropriate revenue rate and an extended price cap incentive mechanism, which can incentive Transco to expand the social best capacity of transmission network.Using the long financial transmission right (LFTR) model, we find that merchant transmission investment is a high efficient market investment approach, which can increase the competition of transmission investment as the complementation of regulated transmission investment. But the Australia transmission expansion experiences show that the success of merchant transmission investment depends on two facts, one is that there must be an independent and efficient transmission pricing mechanism, in which power price should reflect the network congestion and line loss costs, the other one is that the design of transmission pricing mechanism should take the possible crowd out of the regulated transmission investment into account in order to enlarge the merchant investment's compatibility with the regulated one.As the main approaches of transmission expansion, regulated transmission investment and merchant transmission investment both have merits and flaws. In practice, one of feasible choice is that the small scale transmission project can be expanded with merchant investment, and meanwhile large scale transmission projects should be expanded mainly with some regulated transmission investment.In order to change the current situation, we should increase the transmission expansion by absorbing the successful theories and experiences from other countries. According to our country's specific situation, some development strategies are given, which include(l) to change the current single state-ownership to multi-ownership; (2) to further and deepen the reforms in transmission pricing to construct an effective transmission regulatory mechanism; (3) to build a national electricity market and to strengthen the overall planning for transmission expansion; (4) to introduce merchant transmission investment, and to enhance the competition in transmission networks.