D. Enke, B. Chowdhury, G. Gelles, and K. Stanek


Market efficiency, transmission investment, locational marginal price, standard market design, real options, game theory


For several years, much of the deregulated power industry has appeared to be in "repair mode; in other words, the general approach seem to be "fix a problem if it shows up and continue to function until another problem is encountered. Although a free market should generate enough signals within the confines of the market rules to sustain itself in the long run, such is not the norm in the case of the electricity industry. In this paper, market incentives for transmission capacity expansion are explored. A real options framework is presented whereby transmission investment can be funded and financial risks can be minimized. A game theory strategy that can be combined with real options is then introduced for calculating the value and cost of transmission investment. As an example, the use of game theory for allocating cost is presented with a simple three-generator, two-bus example. The proposed method has the advantage of considering the social welfare of all participants in order to ensure that the costs are being fairly allocated to those market participants that will realize the most benefit.

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