Aligning Generators' Interests with Social Efficiency Criteria for Transmission Upgrades in an LMP Based Market

Abstract

In this paper, we present a numerical example to illustrate some situations under which generation companies in locational marginal pricing (LMP) based markets could have the right incentives to support social-welfare-increasing network expansions. In particular, this paper focuses on the incentives that generation firms at generation pockets have to support transmission expansions and how these incentives are affected by the ownership of financial transmission rights (FTRs). We analyze the effect of local market power on such incentives when considering both that generation firms can hold FTRs and that generation firms cannot hold FTRs.