Dynamics of power-transmission capacity expansion under regulated remuneration

Efficient provision of electricity requires timely expansions of power transmission capacity. However, regulation does not always send the right signals to generate the required (and timely) investments. Therefore, it is important to evaluate the effect of alternative regulations on investment on transmission capacity. In this paper, considering regulated remuneration, we perform this evaluation with a behavioral simulation model of the transmission capacity expansion, in which capacity is endogenously determined by the demand/supply relation. Two planning approaches were considered: centralized planning where the investments are fully coordinated by a central organism, and decentralized planning where the capacity expansions are driven by the investors’ rationality on the power market evolution. The model is applied to the Colombian case. The decentralized approach has lower costs (usage charges) than centralized expansion, but lower transmission capacity margins. As low transmission capacity margins create supply risks in high demand periods, regulators can increase coordination in decentralized planning by directly promoting investments that increase security of supply.