TY - JOUR

T1 - Transmission planning in an imperfectly competitive power sector with environmental externalities

AU - Hassanzadeh Moghimi, Farzad

AU - Boomsma, Trine K.

AU - Siddiqui, Afzal S.

N1 - Publisher Copyright: © 2024 The Author(s)

PY - 2024

Y1 - 2024

N2 - Policymakers face the challenge of integrating intermittent output from variable renewable energy (VRE). Even in a well-functioning power sector with flexible generation, producers’ incentives may not align with society's welfare-maximisation objective. At the same time, political pressure can obstruct policymakers from pricing damage from CO2 emissions according to its social costs. In facilitating decarbonisation, transmission planning will have to adapt to such economic and environmental distortions. Using a Stackelberg model of the Nordic power sector, we find that a first-best transmission-expansion plan involves better resource sharing between zones, which actually reduces the need for some VRE adoption. Next, we allow for departures from perfect competition and identify an extended transmission-expansion plan under market power by nuclear plants. By contrast, temporal arbitrage by hydro reservoirs does not necessitate transmission expansion beyond that of perfect competition because it incentivises sufficient VRE adoption using existing lines. Meanwhile, incomplete CO2 pricing under perfect competition requires a transmission plan that matches hydro-rich zones with sites for VRE adoption. However, since incomplete CO2 pricing leaves fossil-fuelled generation economically viable, it reduces the leverage of strategic producers, thereby catalysing less (more) extensive transmission expansion under market power by nuclear (hydro) plants.

AB - Policymakers face the challenge of integrating intermittent output from variable renewable energy (VRE). Even in a well-functioning power sector with flexible generation, producers’ incentives may not align with society's welfare-maximisation objective. At the same time, political pressure can obstruct policymakers from pricing damage from CO2 emissions according to its social costs. In facilitating decarbonisation, transmission planning will have to adapt to such economic and environmental distortions. Using a Stackelberg model of the Nordic power sector, we find that a first-best transmission-expansion plan involves better resource sharing between zones, which actually reduces the need for some VRE adoption. Next, we allow for departures from perfect competition and identify an extended transmission-expansion plan under market power by nuclear plants. By contrast, temporal arbitrage by hydro reservoirs does not necessitate transmission expansion beyond that of perfect competition because it incentivises sufficient VRE adoption using existing lines. Meanwhile, incomplete CO2 pricing under perfect competition requires a transmission plan that matches hydro-rich zones with sites for VRE adoption. However, since incomplete CO2 pricing leaves fossil-fuelled generation economically viable, it reduces the leverage of strategic producers, thereby catalysing less (more) extensive transmission expansion under market power by nuclear (hydro) plants.

KW - Electricity markets

KW - Environmental policy

KW - Game theory

KW - Hydropower

KW - Market power

KW - Transmission planning

U2 - 10.1016/j.eneco.2024.107610

DO - 10.1016/j.eneco.2024.107610

M3 - Journal article

AN - SCOPUS:85193630272

VL - 134

JO - Energy Economics

JF - Energy Economics

SN - 0140-9883

M1 - 107610

ER -