Bert Willems on Transmission Bottlenecks
In energy markets, 'brown' generation based on fossil fuels such as coal and gas co-exists with 'green' generation based on renewable energy sources such as wind and solar power. To reach consumers, both have to use the same transmission lines, whose capacity is limited. The fact that, historically speaking, 'brown' producers were in the market first may affect the allocation of scarce transmission rights, and therefore affect investments.
In TILEC Discussion Paper no. 2017-007, TILEC member Bert Willems and his co-author Georgios Petropoulos (Bruegel) build a simple model of the energy market to investigate this problem. They show that if only spot-market transactions are possible, the 'brown' incumbent has an incentive to invest too early in order to deter entry by a 'green' entrant. Early investment gives the incumbent the commitment to bid aggressively for transmission rights following entry, thereby reducing the entrant's profits.