The Competitive Effects of Transmission Infrastructure in the Indian Electricity Market

Infrastructure can improve welfare both by directly lowering the costs of trade and by fostering competition. I study the competitive effects of transmission infrastructure on welfare in the Indian day-ahead electricity market. Transmission constraints may increase local market power by limiting competition across regions. I estimate firm marginal costs from bids while accounting for transmission constraints. Using these cost estimates, I run counterfactual simulations to measure the effect of increasing transmission capacity given the endogenous response of bidders. I find that relaxing import constraints into the two most constrained regions would increase total market surplus by 19 percent. The strategic response of suppliers to transmission expansions accounts for 72 percent of this gain. The marginal benefits of capacity expansion into the two most constrained regions exceed the marginal costs of investment by factors of 1.63 and 3.50, respectively, indicating that grid expansion would raise social welfare.

Speaker: Nick Ryan, MIT