Merchant transmission investment by generation companies

Abstract

Budget constraints may cause delays in the development of transmission expansion projects. These delays increase the probability of congestion in power systems. The congestions preclude a non-discriminatory access of Generation Companies (GenCos) to transmission network, thus leading to financial losses to certain GenCos. On the other hand, a higher degree of risk is involved in transmission investment, and a long time period is required to return the capital cost. It would, therefore, be effective to offer structures to promote merchant investments in order to lighten the financial burden on the transmission service provider to avoid lengthy delays. This paper proposes a structure to involve the GenCos in merchant transmission investment. The rationale for engaging in such projects is that, as well as the profit from the merchant investment, the GenCos could make further profit from energy production by gaining improved access to load areas. The merchant investment cost of the transmission project is returned through long-term firm contracts together with revenues from financial transmission right. The most profitable plan of the GenCo is identified by conducting a cost-benefit analysis among expansion plans specified by the transmission system operator.