A Merchant Transmission Approach for Uniform-Price Electricity Markets

Uniform-price electricity markets as operated in Germany, for instance, rely on a redispatch mechanism after market clearing to ensure the technical feasibility of generation and consumption schedules with regard to grid constraints. This mechanism determines the costs of congestion management and the welfare loss due to the limited transmission capacity. Therefore, the mechanism is suited to incentivize welfare increasing grid expansion. Depending on the distribution of congestion management costs, it can also align stakeholder interests. In this paper, we present an auction mechanism for transmission grid expansion based on the reduction of redispatch expenditures that theoretically leads to a welfare optimal expansion. The mechanism is applied to a case study in Germany. The results show that the developed mechanism supports an improved planning of grid capacity expansion.