The Effect of Generator-Side Charges on Investment in Power Generation and Transmission Under Demand Uncertainty

Given the increases in renewable energy penetration, appropriately allocating transmission costs is important in generation and transmission investment decisions. This study examines how a generator-side transmission charge affects investment decisions by power generation companies (PC) and the transmission system operator (TSO) under two frameworks differing in who decides investment timing. We compare two frameworks: (1) TSO determines investment timing and the PC determines capacity (TL framework); (2) PC determines investment timing and capacity (GL framework). We examine how variations in generator-side charges and demand uncertainty affect the optimal investment timing, capacity, and social surplus. Regarding investment timing, increases in the generator-side charge led to earlier investment in the TL framework but delayed investment in the GL framework. Concerning investment capacity, the TL framework yielded greater capacity with low uncertainty, while the GL framework supported greater capacity with high uncertainty. The magnitude of the relative social surplus of the two frameworks was reversed according to the generator-side charge and uncertainty. Specifically, the GL framework became increasingly superior to the TL framework as uncertainty increased, and this advantage was amplified by a higher generator-side charge. Policymakers should consider uncertainty and calibrate the level of generator-side charge and the allocation of decision-making authority.