Economic Criteria for Planning Transmission Investment in Restructured Electricity Markets

From an economic perspective, a common criterion for assessing the merits of a transmission investment is its impacts on social welfare. The underlying assumption in using this criterion is that side payments may be used to distribute the social gains among all market players. In reality, however, since the impacts of an electricity transmission project on different players may vary, such side payments are rather difficult to implement. This paper focuses on different economic criteria that should be considered when planning electricity transmission investments. We propose an electricity transmission investment assessment methodology that is capable of evaluating the economic impacts on the various effected stakeholders and account for strategic responses that could enhance or impede the investment´s objectives. We formulate transmission planning as an optimization problem under alternative conflicting objectives and investigate the policy implications of divergent expansion plans resulting from the planner´s level of anticipation of strategic responses. We find that optimal transmission expansion plans may be very sensitive to supply and demand parameters. We also show that the transmission investments have significant distributional impact, creating acute conflicts of interests among market participants. We use a 32-bus representation of the main Chilean grid to illustrate our results.