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The impact of neighboring markets on renewable locations, transmission expansion, and generation investment

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  • Egerer, Jonas
  • Grimm, Veronika
  • Kleinert, Thomas
  • Schmidt, Martin
  • Zöttl, Gregor

Abstract

Many long-term investment planning models for liberalized electricity markets either optimize for the entire electricity system or focus on confined jurisdictions, abstracting from adjacent markets. In this paper, we provide models for analyzing the impact of the interdependencies between a core electricity market and its neighboring markets on key long-run decisions. This we do both for zonal and nodal pricing schemes. The identification of welfare optimal investments in transmission lines and renewable capacity within a core electricity market requires a spatially restricted objective function, which also accounts for benefits from cross-border electricity trading. This leads to mixed-integer nonlinear multilevel optimization problems with bilinear nonconvexities for which we adapt a Benders-like decomposition approach from the literature. In a case study, we use a stylized six-node network to disentangle different effects of optimal regional (as compared to supra-regional) investment planning. Regional planning alters investment in transmission and renewable capacity in the core region, which affects private investment in generation capacity also in adjacent regions and increases welfare in the core region at the cost of system welfare. Depending on the congestion-pricing scheme, the regulator of the core region follows different strategies to increase welfare causing distributional effects among stakeholders.

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  • Egerer, Jonas & Grimm, Veronika & Kleinert, Thomas & Schmidt, Martin & Zöttl, Gregor, 2021. "The impact of neighboring markets on renewable locations, transmission expansion, and generation investment," European Journal of Operational Research, Elsevier, vol. 292(2), pages 696-713.
    • Handle: RePEc:eee:ejores:v:292:y:2021:i:2:p:696-713
    DOI: 10.1016/j.ejor.2020.10.055
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    References listed on IDEAS

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    2. Egerer, Jonas & Grimm, Veronika & Lang, Lukas Maximilian & Pfefferer, Ulrike, 2025. "The coal phase-out in Germany and Central Western Europe under new framework conditions," Energy Economics, Elsevier, vol. 151(C).
    3. Andreas Bärmann & Robert Burlacu & Lukas Hager & Thomas Kleinert, 2023. "On piecewise linear approximations of bilinear terms: structural comparison of univariate and bivariate mixed-integer programming formulations," Journal of Global Optimization, Springer, vol. 85(4), pages 789-819, April.
    4. Jonas Egerer & Veronika Grimm & Lukas M. Lang & Ulrike Pfefferer, 2022. "Kohleausstieg 2030 unter neuen Vorzeichen [The German Coal Phase-Out in 2030 Under Current Developments]," Wirtschaftsdienst, Springer;ZBW - Leibniz Information Centre for Economics, vol. 102(8), pages 600-608, August.
    5. Xie, Bai-Chen & Yang, Yan-Shen & Chen, Xian-Peng, 2025. "Effect of grid expansion on interregional power dispatch towards carbon neutrality based on market equilibrium model," Energy Economics, Elsevier, vol. 151(C).
    6. Jonas Egerer & Veronika Grimm & Lukas M. Lang & Ulrike Pfefferer & Christian Sölch, 2022. "Mobilisierung von Erzeugungskapazitäten auf dem deutschen Strommarkt [Mobilisation of Generation Capacity for the German Electricity Market]," Wirtschaftsdienst, Springer;ZBW - Leibniz Information Centre for Economics, vol. 102(11), pages 846-854, November.
    7. Lété, Quentin & Smeers, Yves & Papavasiliou, Anthony, 2022. "An analysis of zonal electricity pricing from a long-term perspective," Energy Economics, Elsevier, vol. 107(C).
    8. Wolff, Michael & Becker, Tristan & Walther, Grit, 2023. "Long-term design and analysis of renewable fuel supply chains – An integrated approach considering seasonal resource availability," European Journal of Operational Research, Elsevier, vol. 304(2), pages 745-762.
    9. Thomas Mobius & Mira Watermeyer & Oliver Grothe & Felix Musgens, 2023. "Enhancing Energy System Models Using Better Load Forecasts," Papers 2302.11017, arXiv.org.
    10. Li, Longxi, 2026. "Coordinated design of multi-stakeholder distributed energy systems with flexible demand resources from an energy-sharing perspective," Applied Energy, Elsevier, vol. 404(C).
    11. Michiel Kenis & Vladimir Dvorkin & Tim Schittekatte & Kenneth Bruninx & Erik Delarue & Audun Botterud, 2024. "Evaluating Offshore Electricity Market Design Considering Endogenous Infrastructure Investments: Zonal or Nodal?," Papers 2405.13169, arXiv.org.
    12. Grimm, Veronika & Sölch, Christian & Zöttl, Gregor, 2022. "Emissions reduction in a second-best world: On the long-term effects of overlapping regulations," Energy Economics, Elsevier, vol. 109(C).

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