Network Cost Allocation Games on Growing Electricity Grids

This paper examines major problems with commonly proposed approaches to network cost allocation games, with a focus on cooperative game theory and its limitations. Such games arise in many contexts, such as determining connection fees for growing electricity networks, micro-grids, fiber-optic cable networks, or even in setting up new municipal water and sewage systems. We consider several challenges arising in scenarios with multi-period network growth and strategic users with reservation prices, and propose an incentive-compatible pricing mechanism that addresses these challenges while ensuring network cost-recovery and avoiding certain user decisions that can lead to significant social welfare losses. Our discussion focuses on electricity grids, but is generalizable to a range of network types.