A Game-Theoretic Modeling Approach for Merchant Transmission Planning

Merchant transmission investments are regarded as a potential element of a fully liberalized electricity industry. However, the strategic interactions between a large number of merchant investors and the social efficiency of the emerging transmission planning outcome have not been satisfactorily investigated yet. In this context, this paper proposes a novel game-theoretic approach, modeling the competing investors as a continuum of players and characterizing the outcome of merchant transmission planning as a Nash equilibrium. This outcome is compared against the centralized planning solution in a number of case studies, under different assumptions. The presented results strongly suggest that the merchant planning paradigm is capable of maximizing social welfare only when fixed investment costs are neglected and the network is strictly radial. As these conditions do not generally hold in reality, these findings indicate the necessity of further studies and regulatory interventions for an efficient deployment of the merchant planning paradigm.