Contents lists available at ScienceDirect Electrical Power and Energy Systems journal homepage: www.elsevier.com/locate/ijepes Dynamics of power-transmission capacity expansion under regulated remuneration Cristian Zambrano, Santiago Arango-Aramburo ⁎ , Yris Olaya Universidad Nacional de Colombia, Sede Medelín, Facultad de Minas. Cra. 80 No. 65-223, Medellín, Colombia ARTICLE INFO Keywords: Power transmission planning Capacity expansion System dynamics Electricity markets ABSTRACT Efficient provision of electricity requires timely expansions of power transmission capacity. However, regulation does not always send the right signals to generate the required (and timely) investments. Therefore, it is im- portant to evaluate the effect of alternative regulations on investment on transmission capacity. In this paper, considering regulated remuneration, we perform this evaluation with a behavioral simulation model of the transmission capacity expansion, in which capacity is endogenously determined by the demand/supply relation. Two planning approaches were considered: centralized planning where the investments are fully coordinated by a central organism, and decentralized planning where the capacity expansions are driven by the investors’ ra- tionality on the power market evolution. The model is applied to the Colombian case. The decentralized ap- proach has lower costs (usage charges) than centralized expansion, but lower transmission capacity margins. As low transmission capacity margins create supply risks in high demand periods, regulators can increase co- ordination in decentralized planning by directly promoting investments that increase security of supply. 1. Introduction Electricity markets need timely transmission capacity expansions to maintain the security of supply. Efficient expansion prevents blackouts and shortages that generate price rises, welfare losses for demand and generators, and increases in operating and maintenance (O&M) costs for grid operators. Defining such expansions is a complex task. Under traditional market conditions, the expansion considers technical, eco- nomic, and environmental issues, taking into account uncertainty about electricity demand, capital constraints, and environmental impacts, among others [1]. Nowadays, the new role of the transmission in modern electricity markets must consider distributed generation from renewable sources [2,3], and the regional planning in a context of markets integration [4]. Besides, electricity transmission exhibits ne- gative externalities [5,6] and economies of scale [7–9] that complicate the allocation of transmission costs to market players and the estima- tion of the profitability of investments. As a result, it is possible to face an excess or a lack of investment in transmission capacity [10,11]. These features are crucial when planning and defining mechanisms for capacity expansion in power transmission. Expansion of transmission capacity can be centrally planned so that investments in transmission and generation are fully coordinated using capacity auctions. This is normally the approach in regulated and vertically integrated monopolies, or in deregulated markets with a central transmission capacity planner. The goal in this approach is to minimize the long-term system cost (the social cost) while ensuring security of supply [12]. The main drawback of centrally planning ex- pansion is that expansion alternatives respond to reliability criteria. Then, intuitively, the emphasis on maintaining reliability could lead to over investment and increased consumer costs. Additionally, traditional centralized planning are reactive [13], therefore it does not respond to market competition along the value chain of the power industry. Decentralized planning has been proposed to attract investment from third parties (merchant expansion) in deregulated markets [14,15]. Under decentralized planning, market agents can plan and build transmission projects by themselves. Decentralized expansion of transmission is associated with nodal pricing markets in which new investments are compensated by the value of congestion [16,17]. However, it is difficult, if not impossible, to have a fully decentralized expansion of transmission in current markets [18] because some in- vestments, such as the investments required for maintaining and up- grading facilities, can only be implemented by the incumbent and, therefore, they are not open for competition. Moreover, network ex- ternalities and uncertainty increase the risk of not recovering invest- ment costs [19,20] and regulation is still needed to control market power and free riding [14,18], and for offering incentives to develop https://doi.org/10.1016/j.ijepes.2018.07.029 Received 16 February 2018; Received in revised form 26 June 2018; Accepted 16 July 2018 ⁎ Corresponding author. E-mail addresses: cozambra@unal.edu.co (C. Zambrano), saarango@unal.edu.co (S. Arango-Aramburo), yolayam@unal.edu.co (Y. Olaya). Electrical Power and Energy Systems 104 (2019) 924–932 0142-0615/ © 2018 Elsevier Ltd. All rights reserved. T