Transmission investment under uncertainty: Reconciling private and public incentives

Private companies (PCs) in restructured electricity industries determine facility investment timing and sizing. Such decisions maximize the PC’s expected profit (rather than social welfare) under uncertainty. By anticipating incentives, a welfare-maximizing transmission system operator (TSO) shapes network to align public private objectives. Via an option-based approach, we first quantify welfare losses from TSO’s conflicting We show that by optimal capacity of profit-maximizing PC, TSO is able reduce, though not eliminate, loss. Next, exploit dependence on infrastructure design devise proactive transmission-investment strategy. Hence, mitigate arising misaligned incentives even relatively uncertain markets.