Merchant Transmission Investment

   (490 K)

We examine the performance attributes of a merchant transmission investment framework that relies on market driven' transmission investment to provide the infrastructure to support competitive wholesale markets for electricity. Under a stringent set of assumptions, the merchant investment model has a remarkable set of attributes that appear to solve the natural monopoly problem traditionally associated with electricity transmission networks. We extend the merchant investment model to incorporate imperfections in wholesale electricity markets, lumpiness in transmission investment opportunities, stochastic attributes of transmission networks and associated property rights definition issues, the effects of behavior of transmission owners and system operators on transmission capacity, maintenance and reliability, coordination and bargaining considerations, forward contract, commitment and asset specificity issues. Incorporating these more realistic attributes of transmission networks and the behavior of transmission owners and system operators undermines the attractive properties of the merchant model and leads to inefficient transmission investment decisions.

Published: Joskow, Paul and Jean Tirole. "Merchant Transmission Investment," Journal of Industrial Economics, 2005, v53(2,Jun), 233-264.

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