Risk allocation for efficient and timely transmission investment under markets with high demand growth

Abstract

Under the need for anticipatory efficient investment in transmission, several problems arise at the regulation and incentives level; economies of scale justify carrying out larger initial transmission investments that existing generation and demand may be not willing to pay. This problem is increased with high demand growth where anticipatory investment is crucial for converging to an efficient electric system. Without anticipatory investment, the net number of lines in the long term may be duplicated/triplicated and/or the cost of reinforcing may sharply increase as lines were not initially built to be (easily) upgraded. This cost increase, assumed by generators in the case of additional lines, can ultimately create a barrier to entry for new agents and therefore constrains competition in the market while also impacting end user tariffs. In this paper a formal methodology is proposed to allocate the extra funds needed to build upgradeable additional lines. This is applied to a particular case in the Chilean electricity market.