4 . Problems of transmission investment in a deregulated power

From the earliest days of commercial power production, transmission has grown steadily in importance. New wholesale power markets have sparked interest in distributed generation, but trade between these markets has only increased the need for transmission investment. As with generation, a market for the use of existing assets is not difficult to imagine, but a market to supply these assets is more problematic. In fact, the discrepancies between the properties of transmission costs and benefits and the assumptions of competitive economic theory are so substantial that a market solution is probably not desirable. Even incentive regulation may prove so difficult to design and so inaccurate that a planning solution may be preferable, at least until wholesale power markets are functioning efficiently and the generation–investment problem has been solved. Transmission, an exceptionally heterogeneous product, can be both a substitute for and complement to generation, and suffers from returns to scale and lumpiness,1 as well as major externalities, both positive and negative. This chapter investigates the extent to which can be overcome. To simplify, this chapter ignores transmission losses because they play a relatively small role in the investment problem and one similar to the role of congestion, which is considered. After introducing some properties of congestion prices and transmission costs, three basic approaches to transmission investment are explored.*