Electricity auctions in the presence of transmission constraints and transmission costs

This paper analyzes the effect of transmission constraints and tariffs on outcomes in a discriminatory-price electricity auctions. With point of connection tariffs, which are used in the majority of the European countries, suppliers pay a tariff for the total electricity injected into the grid. In contrast, with transmission tariffs, suppliers only pay a tariff for the electricity sold in the other market. Transmission tariffs outperform point of connection tariffs by maximizing consumers' welfare and transmission efficiency. If the transmission tariffs are zero, an increase in transmission capacity is pro-competitive. In contrast, if the transmission tariffs are positive, an increase in transmission capacity is pro-competitive only when the transmission capacity is low.