Market-based rate design for recovering merchant transmission investment

Merchant transmission projects (MTPs) are primarily market solutions for importing inexpensive power when this energy is available. As a market driven solution, full recovery of the investment is not guaranteed. In general, the recovery is based on transmission service charges and the value of incremental financial transmission rights (FTRs) created by the project. Since FTRs are valuable only when the system is constrained, the FTR´s value diminishes as the constraint is eliminated by the MTP. Hence, the MTP will be commercially viable only if its transmission capacity is fully subscribed. Otherwise, the MTP will likely not be built. This paper presents a two-step market-based transmission rate design for recovering an MTP investment. The first step is to develop a firm transmission service rate for using the MTP via an open subscription bid process. If the MTP capacity is not fully subscribed, the authors propose that the remaining investment be recovered via nonfirm transmission services if and when cheap energy is available. Considering the random availability of economic energy, this second step identifies the range of transmission rates for developing possible rate discounts to encourage non-firm transmission usages to optimize the MTP investment recovery.