Abstract

The electricity sector is in an unprecedented time of transition. The industry is in the process of adjusting from traditional fossil-fuel to renewable generation, from large-scale to distributed generation and from vertically-integrated monopolies to vertically separated industrial structures under diverse forms of competition. Efficient transmission investment planning and regulation is more important than ever, but this task has become extremely complex. Increasing penetration of intermittent generation makes predicting network flow patterns increasingly difficult. Moreover, the potential role for hydrogen as an alternative energy source in both domestic and transportation uses, makes predicting the long-term future of electricity demand more uncertain than at any time in its history. In this paper, we review key issues in electricity transmission investment and regulation. We start by reviewing the task of the theoretical well-intentioned network planner, and the complications that arise when transmission investment is separated from generation investment. We then review the issues associated with governing the transmission planner, including the question whether it is possible to design a financial mechanism which delivers correct incentives. We also discuss the question of whether it is possible to design a mechanism which allows transmission investment to be left entirely to the private sector. We finish with a summary of the key future challenges facing the sector in this time of transition.

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