Transmission and storage expansion planning under imperfect market competition: social planner versus merchant investor

Abstract

The growing penetration of renewable technologies and the increasing need for energy storage technologies constitute a new challenge for electricity market design. In this context, decentralized generation companies decide their investments by maximizing their own profit, while centralized TSOs decide network expansion by aiming to maximize the overall social welfare. This already challenging environment is further complicated by the intermittency of renewable production and the short- and long-term dynamics of storage technologies, which may enable generation companies to exercise new forms of market power. However, traditional (and widely utilized) cost minimization planning models do not account for these types of strategic interactions, nor for the introduction of new transmission merchant investors needed to achieve the full integration of isolated renewables in the system. In this paper, we study the policy implications of planning the system, either by a merchant investor or by a traditional cost-minimization planner, instead of a social planner through a proactive framework that accounts for distinctive degrees of competition. Therefore, we present a bi-level proactive transmission framework, in which a centralized TSO takes network investment decisions by anticipating the reaction of decentralized generation companies, as well as a merchant investor that maximizes congestion rents. Finally, we carry out a comprehensive analysis of a 3-node greenfield case, and we extract more general insights from a brownfield IEEE 24-node case. We found that, compared to a social planner, both the traditional cost-minimization planner and the merchant investor would lead to a relatively small diminishing of social welfare. Nonetheless, the resulting generation mix of the system can drastically change.

The growing penetration of renewable technologies and the increasing need for energy storage technologies constitute a new challenge for electricity market design. In this context, decentralized generation companies decide their investments by maximizing their own profit, while centralized TSOs decide network expansion by aiming to maximize the overall social welfare. This already challenging environment is further complicated by the intermittency of renewable production and the short- and long-term dynamics of storage technologies, which may enable generation companies to exercise new forms of market power. However, traditional (and widely utilized) cost minimization planning models do not account for these types of strategic interactions, nor for the introduction of new transmission merchant investors needed to achieve the full integration of isolated renewables in the system. In this paper, we study the policy implications of planning the system, either by a merchant investor or by a traditional cost-minimization planner, instead of a social planner through a proactive framework that accounts for distinctive degrees of competition. Therefore, we present a bi-level proactive transmission framework, in which a centralized TSO takes network investment decisions by anticipating the reaction of decentralized generation companies, as well as a merchant investor that maximizes congestion rents. Finally, we carry out a comprehensive analysis of a 3-node greenfield case, and we extract more general insights from a brownfield IEEE 24-node case. We found that, compared to a social planner, both the traditional cost-minimization planner and the merchant investor would lead to a relatively small diminishing of social welfare. Nonetheless, the resulting generation mix of the system can drastically change.