In PWP-030, Bushnell and Stoft examine the long-run efficiency of a restructured electric power industry; and therefore the incentives for capital investment both in generation and in transmission. To date, the debate over restructuring has focussed almost exclusively on problems of transition and of the functioning of the subsequent market in electric power, but has paid scant attention to the functioning of the market for capital investments.
The authors focus principally on what have been called "transmission congestion contracts" (TCCs). These were designed to be used in conjunction with "contracts for differences" to remove the congestion cost uncertainties from long-term bilateral contracts between generators and purchasers. They show that TCCs fill this role well, and could thus provide the "bankability" needed by independent power producers when they seek funding.
In order to avoid the problems of regulating a transmission grid monopoly, it has been suggested that a party who invests in the grid should be rewarded with TCCs for the extra transmission capacity thereby created. This would reimburse the investor should his additions become congested and thus not available for his own use. Bushnell and Stoft formalize the concepts put forward by William Hogan and others for rewarding investment, and then make a preliminary investigation into its incentive properties. They find that if power market participants, can form sufficiently cooperative coalitions, the incentive may be efficient. This analysis is intended to form the basis for a more definitive study of investment incentives.