Electricity Transmission Pricing: How much does it cost to get it wrong?

Richard Green
Cambridge University

Economists know how to calculate optimal prices for electricity transmission. These are rarely applied in practice. This paper develops a thirteen node model, based on the transmission system in England and Wales, incorporating losses and transmission contraints. It is solved with optimal prices, and with uniform prices for demand and generation, but re-dispaching to take account of transmission contraints. Counting consumer surplus and generators' operating cost alone, moving from optimal prices to uniform prices reduces welfare by 0.7% of the generators' revenue. A less efficient re-dispatch could raise these cost significantly.