Transmission Investment under Uncertainty: Reconciling Private and Public Incentives

Maria Lavrutich*, Verena Hagspiel, Afzal Siddiqui

*Corresponding author for this work

Research output: Contribution to journalArticleScientificpeer-review

1 Citation (Scopus)
70 Downloads (Pure)

Abstract

Private companies (PCs) in restructured electricity industries determine facility investment timing and sizing. Such decisions maximize the PC’s expected profit (rather than social welfare) under uncertainty. By anticipating the PC’s incentives, a welfare-maximizing transmission system operator (TSO) shapes the network to align public and private objectives. Via an option-based approach, we first quantify welfare losses from the PC’s and TSO’s conflicting objectives. We show that by anticipating the optimal timing and capacity decisions of the profit-maximizing PC, the TSO is able to reduce, though not eliminate, welfare loss. Next, we exploit the dependence of the PC’s capacity on the TSO’s infrastructure design to devise a proactive transmission-investment strategy. Hence, we mitigate welfare losses arising from misaligned incentives even in relatively uncertain markets.
Original languageEnglish
Pages (from-to)1167-1188
Number of pages22
JournalEuropean Journal of Operational Research
Volume304
Issue number3
Early online date2022
DOIs
Publication statusPublished - 1 Feb 2023
MoE publication typeA1 Journal article-refereed

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