Electricity transmission pricing : how much does it cost to get it wrong?

Abstract

Economists know how to calculate optimal prices for electricity transmission. These are rarely applied in practice. This paper develops a thirteen node model of the transmission system in England and Wales, incorporating losses and transmission constraints. It is solved with optimal prices, and with uniform prices for demand and for generation, re-dispatching when needed to take account of transmission constraints. Moving from uniform prices to optimal nodal prices could raise welfare by 1.5% of the generators₂ revenues, and would be less vulnerable to market power. It would also send better investment signals, but create politically sensitive regional gains and losses.