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The impact of market design on transmission and generation investment in electricity markets

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  • Grimm, Veronika
  • Rückel, Bastian
  • Sölch, Christian
  • Zöttl, Gregor

Abstract

In this paper we propose an equilibrium model in order to analyze the impact of electricity market design on generation and transmission expansion in liberalized electricity markets. In a multi-level structure, our framework takes into account that generation investment and operation is decided by private investors, while network expansion and redispatch is decided by a regulated transmission system operator — as well as the different objectives of firms (profit maximization) and the regulator (welfare maximization). In order to illustrate the possibilities to quantify long term economic effects with our framework, we calibrate our model for the German electricity market. We consider various moderate adjustments of the market design: (i) the division of the market area into two price zones, (ii) the efficient curtailment of renewable production and (iii) a cost-benefit-driven balance between network expansion and network management measures. We then analyze the impact of these market designs on generation and transmission investment in case those design elements are anticipated upon network development planning. The resulting investment and production decisions are compared to a benchmark that reflects the current German electricity market design and to an overall optimal first-best benchmark. Our results reveal that price zones do have a significant impact on locational choice of generators and result in a reduced need for network expansion, but lead to only moderate annual welfare gains of approximately 0.9% of annual total system costs. Anticipation of optimal curtailment of renewables and a cost-benefit-driven use of redispatch operations upon network expansion planning, however, implies a welfare gain of over 4.9% of annual total system costs per year as compared to the existing market design, which equals 85% of the maximum possible welfare gain of the first-best benchmark.

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  • Grimm, Veronika & Rückel, Bastian & Sölch, Christian & Zöttl, Gregor, 2021. "The impact of market design on transmission and generation investment in electricity markets," Energy Economics, Elsevier, vol. 93(C).
    • Handle: RePEc:eee:eneeco:v:93:y:2021:i:c:s0140988320302747
    DOI: 10.1016/j.eneco.2020.104934
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    More about this item

    Keywords

    Electricity markets; Network expansion; Generation expansion; Investment incentives; Market design; Congestion management; Computational equilibrium models;
    All these keywords.

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D41 - Microeconomics - - Market Structure, Pricing, and Design - - - Perfect Competition
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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