Investigating the Social Efficiency of Merchant Transmission Planning Through a Non-cooperative Game-Theoretic Framework

Merchant transmission planning is considered as a further step toward the full liberalization of the electricity industry. However, previous modeling approaches do not comprehensively explore its social efficiency as they cannot effectively deal with a large number of merchant companies. This paper addresses this fundamental challenge by adopting a novel non-cooperative game-theoretic approach. Specifically, the number of merchant companies is assumed sufficiently large to be approximated as a continuum. This allows the derivation of mathematical conditions for the existence of a Nash equilibrium solution of the merchant planning game. By analytically and numerically comparing this solution against the one obtained through the traditional centralized planning approach, the paper demonstrates that merchant planning can maximize social welfare only when the following conditions are satisfied: a) fixed investment costs are neglected and b) the network is radial and does not include any loops. Given that these conditions do not generally hold in reality, these findings suggest that even a fully competitive merchant transmission planning framework, involving the participation of a very large number of competing merchant companies, is not generally capable of maximizing social welfare.