The Economics of Electricity Markets

18Efficient Investment in Network Assets

In Part IV, we explored the conditions for efficient investment in generation and load assets. Now, in this part, we extend those conditions to include efficient investment in network assets.

18.1 Efficient AC Network Investment

Network investment decisions are inherently long-run decisions. Therefore, we need a long-run investment model. Since generation capacity can also be adjusted in the long run, we need to consider network investment decisions in combination with generation capacity decisions.

As with the discussion of generation investment in Chapter 9, let us start from the assumption that network investment is neither sunk nor lumpy. In addition, we will assume (as throughout this text) that losses can be ignored.

To proceed, let us consider a slight generalisation of the problem set out in Chapter 9. In that problem, we have a set of potential generation and/or consumption locations indexed by i. In state s of the world, the generation of type t and location i has a cost function . We can then determine the benefit function .

Now let us suppose that the we have a set of possible network configurations indexed by . Network involves ...