The Investor's Dilemma: Generation or Transmission Expansion?

In an idealized restructured electricity industry, market participants always find economic incentives to invest in new generation and in new transmission. Intuitively, one can say that generation and transmission expansion projects can be a complement or a substitute of each other. This paper studies to what extent generation and transmission expansion projects are interchangeable. This is done with a radial network and with one that includes loop flows. This work also shows that, whenever considering a transmission expansion, the changes in the resistance and in the reactance of the transmission lines cannot be disregarded; just increasing the capacity of the line is not enough. The social value of the investment, either in generation or transmission, is affected by the presence of market power. This is shown with a simple radial network under the assumption that the firm in the import constrained area behaves as a monopolist.