This paper addresses the investment coordination problem in a vertically separated electricity supply industry in the absence of locational pricing. In an electricity system, investments in network and power plants need to be coordinated. Unbundling eliminates firm-internal coordination. Information exchange might restore coordination if communication is truthful. Based on model results we analyse whether cheap talk of generator investors would be credible and hence informative for network investment decisions. We show that due to perverse incentives, this is not generally the case. We propose cost-reflective, locational network pricing as a coordination device to internalize the incentive problem.
ACER. (2014) Opinion of the Agency for the Cooperation of Energy Regulators No 09/2014 of 15 April 2014.
2.
AgrellPer J.BogetoftPeter and MikkersMisja. (2013) “Smartgrid investments, regulation and organization”, Energy Policy, 52, 656–666.
3.
AumannRobert J. (1990) Nash Equilibria are not Self-Enforcing. Economic decisionmaking: Games, Econometrics and Optimisation, Contributions in Honour of Jacques H. Dreze, 201–206.
4.
AumannRobert J. and HartSergiu. (2003) “Long Cheap Talk”, Econometrica, 71(6), 1619–1660.
5.
BaldickRoss and KahnEdward. (1993) “Network Costs and the Regulation of Wholesale Competition in Electric Power”, Journal of Regulatory Economics, 5(4), 367–384.
6.
BaligaSandeep and MorrisStephen. (2002) “Co-ordination, Spillovers, and Cheap Talk”, Journal of Economic Theory, 105(2), 450–468.
7.
BalmertDavid, and BrunekreeftGert. (2010) “Deep ISOs and Network Investment”, Competition and Regulation in Network Industries, 1, 27–49.
8.
BrandstättChristineBrunekreeftGert and FriedrichsenNele. (2011) “Locational signals to reduce network investments in smart distribution grids: What works and what not?”, Utilities Policy, 19, 244–254.
9.
BrandstättChristineBrunekreeftGert and FriedrichsenNele. (2012) “Smart pricing to reduce network investment in smart distribution grids – experience in Germany”, In SioshansiF.P. and FereidoonP. (ed), Smart Grid: Integrating Renewable, Distributed and Efficient Energy. Elsevier.
10.
BrunekreeftGert and FriedrichsenNele. (2010) Vertical unbundling, the coordination of investment, and network pricing. Bremen Energy Working Paper, 3, August 2010.
11.
BrunekreeftGert and McDanielTanga M. (2005) “Policy Uncertainty and Supply Adequacy in Electric Power Markets”, Oxford Review of Economic Policy, 21(1), 111–127.
12.
BrunekreeftGertNeuhoffKarsten and NewberyDavid. (2005) “Electricity Transmission: An Overview of the Current Debate”, Utilities Policy, 13(2), 73–93.
13.
Cambridge Economic Policy Associates Ltd. (2011) Review of International Models of Transmission Charging Arrangements. A Report for Ofgem.
14.
DENA. (2012) Dena-Verteilnetzstudie. Ausbau- und Innovationsbedarf der Stromverteilnetze in Deutschland bis 2030.
15.
DietrichKristinLeutholdFlorian and WeigtHannes. (2010) “Will the Market Get it Right? The Placing of New Power Plants in Germany”, Zeitschrift für Energiewirtschaft, 34, 255–265.
16.
ENTSOE. (2010) Ten-Year Network Development Plan 2010–2020 – Non-binding community-wide ten-year network development plan – pilot project final. Tech. rept. European Network of Transmission System Operators for Electricity.
17.
ENTSOE. (2014) ENTSO-E Overview of transmission tariffs in Europe: Synthesis 2014 June 2014. Tech. rept. European Network of Transmission System Operators for Electricity.
18.
ETSO. (2003) Report on Renewable Energy Sources (RES). European Transmission System Operators.
19.
European Commission. (2007) Report on Energy Sector Inquiry SEC(2006)1724, 10 January 2007. European Commission, DG Competition.
FarellJoseph. (1993) “Meaning and Credibility in Cheap-Talk Games”, Games and Economic Behavior, 5(4), 514–531.
22.
FarellJoseph and RabinMatthew. (1996) “Cheap Talk”, The Journal of Economic Perspectives, 10(3), 103–118.
23.
FriedrichsenNele. (2012) “Governing smart grids: The case for an independent system operator”, European Journal of Law and Economics, 1–20.
24.
GreenRichard. (2007) “Nodal pricing of electricity: How much does it cost to get it wrong?”, Journal of Regulatory Economics, 31(2), 125–149.
25.
GrimmVeronikaMartinAlexanderWeibelzahlMartin and ZöttlGregor. (2014) Transmission and generation investment in eletricity markets: The effects of market splitting and networkfee regimes. Discussion Paper No. 460 – Governance and the efficiency of economic systems (GESY), 460.
26.
JoskowPaul and SchmalenseeRichard. (1983) Markets for Power: An Analysis of Electric Utility Deregulation. MIT Press.
27.
JoskowPaul and TiroleJean. (2005) “Merchant Transmission Investment”, Journal of Industrial Economics, 53(2), 233–264.
28.
KwokaJohn E. (2002) “Vertical Economies in Electric Power: Evidence on Integration and its Alternatives”, International Journal of Industrial Organization, 20, 653–671.
29.
LeutholdFlorianWeigtHannes and von HirschhausenChristian. (2008) “Efficient pricing for European electricity networks-The theory of nodal pricing applied to feeding-in wind in Germany”, Utilities Policy, 16(4), 284–291.
30.
LiFurong. (2007) “The Benefit of a Long-run Incremental Pricing Methodology to Future Network Development”, IEEE Power Engineering Society General Meeting, 24–28 June 2007, Tampa, Florida USA.
31.
LiFurongTolleyDavidPadhyNarayana P. and WangJi. (2005) Network Benefits from Introducing an Economic Methodology for Distribution Charging. Tech. rept. Department of Electronic and Electrical Engineering, University of Bath.
32.
LiFurongTolleyDavidPadhyNarayana Prasad and WangJi. (2009) Framework for assessing the economic efficiencies of long-run network pricing models. IEEE Transactions on Power Systems, 24(4), 1641–1648.
33.
MeyerRoland. (2011) Vertical Economies of Scope in Electricity Supply – Analysing the Cost of Ownership Unbundling. Ph.D. thesis, Jacobs University Bremen.
34.
NemotoJiro, and GotoMika. (2004) “Technological Externalities and Economies of Vertical Integration in the Electric Utility Industry”, International Journal of Industrial Organization, 22(1), 67–81.
35.
OFGEM. (2009) Electricity Distribution Structure of Charges Project: The Common Distribution Charging Methodology at Lower Voltages. Decision Document 140/09. Office of the Gas and Electricity Markets.
36.
OFGEM. (2012) Consultation on charging methodology for higher voltage distributed generation, Consultation and impact assessment, Reference: 115/12, Publication date: 17 August 2012. Office of the Gas and Electricity Markets.
37.
ScheepersMartinBauknechtDierkJansenJaapde JoodeJeroenGómezTomásPudjiantoDannyRopenusStephanie and StrbacGoran. (2007cheepers, MartinBauknechtDierkJansende JaapJoodeJeroenGómezTomásPudjiantoDannyRopenusStephanie and StrbacGoran. (2007 (2007) Regulatory Improvements for Effective Integration of Distributed Generation into Electricity Distribution Networks – Summary of the DG-GRID project results.
38.
StrbacGoran and MutaleJoseph. (2007) Framework and Methodology for Pricing of Distribution Networks with Distributed Generation – A report to OFGEM. Tech. rept. Centre for Distributed Generation and Sustainable Electrical Energy.
39.
Wissenschaftlicher Beirat beim Bundesministerium für Wirtschaft und Energie. (2014) Engpassbasierte Nutzerfinanzierung und Infrastrukturinvestitionen in Netzsektoren.
