Economics of Electricity System I: Dispatching, Network Access, and Transmission Capacity Expansion

The electricity market reform in Japan, ongoing since 2015, is difficult to understand, because it includes a wide range of policy measures, and the electricity system has complicated technical characteristics. Furthermore, the reforms in many other developed countries are about ten years ahead of Japan, and there is a lot to learn from their successes and failures. This paper reviews the economic aspects of the electricity market, using a simplified model of an electricity network. The difference from the standard microeconomic model is the special feature of the current electricity market, for which, in order to avoid a blackout, supply must follow demand continuously because demand is not price-responsive in the short run. This paper examines basic short-run and long-run issues that can be handled in a deterministic model with no uncertainty, specifically, the properties of the optimal solution concerning dispatching, network access, and transmission expansion, and the market design necessary to achieve the optimal solution.