Strategic Management of Transmission Access to the Electricity Grid

The electric power industry has fully entered a new era. The industry has been consistently moving away from vertical integration and monopoly, and towards a competitively organized industry. There remain unfulfilled requirements for institutional reform. In this paper we confront existing strategic hypotheses about the nature of networked competition. The approaches adopted across countries varies in terms of market and system operation, property rights and investment incentives. A number of key concepts emerged as central to the organization of the grid, including nodal pricing, transmission capacity rights, and compensation for wire ownership. Traditionally grid management was conducted cooperatively, and through committee agreement by network operators. Where possible, network stability was ensured through the provision of excess transmission capacity. Economic pressures have resulted in a more competitive market, with attendant concerns about efficiency, decentralization and three profitability of participants. Nonetheless, a set of core, generalizable problems in congestion management with regards to congestion pricing remain which are not easily resolved through simple solutions as the interrelated systems increase in size spatially. The first attempt to resolve these problems and provide a universal framework involved creating contract networks. Contract networks entail the market allocation of long-term capacity rights for transmission. Unfortunately theory, experiment, and experience have demonstrated that the rational expectation of congestion can lead to collusion and rent-taking even on uncongested networks. An alternative approach involves endowing a network operator with joint match-making and dispatch responsibilities. This approach involves considerable centralization and network oversight. Worse, the indirect implementation of transmission rights has not been proven to remove the chief difficulties. A final, and more elaborate market mechanism, namely Financial Transmission Rights (FTR) has been proposed involving the joint trading of energy and transmission capacity. We demonstrate the current situation, where we are heading in congestion management and creation of a pan European power grid. The challenges ahead are discussed. The study serves as a basis for a wider research project in which we examine the action of strategic behavior on small, analytic models of the electricity grid. As a result, we intend to confront existing strategic hypotheses about the nature of networked competition, comparing and contrasting the relative efficiency of these network management proposals using formal theories derived from cooperative game theory.