Capacity Premium Model to Assure Social Optimal Transmission Expansion in a Profit Driven Framework

In deregulated electricity markets, optimal transmission expansion achieved by a centralized planner with social welfare objective is higher than that achieved by investors with profit maximization objective. From a system operators perspective it is desirable to have social optimal transmission expansion. To achieve this in a profit driven framework, however, a monetary incentive mechanism is needed to encourage profitable transmission expansion to social optimal levels. This paper proposes capacity Premiums that could assure social optimal transmission capacity based on network users willingness to pay and which ensures that investors get adequate incentives for installing additional transmission capacity. Incentives for optimal transmission expansion are based on realistic market signals.