Transmission planning in an imperfectly competitive power sector with environmental externalities

• Published in: Energy economics Vol. 134; p. 107610
• Main Authors: Hassanzadeh Moghimi, Farzad, Boomsma, Trine K., Siddiqui, Afzal S.
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01.06.2024
• Subjects: Computer and Systems Sciences; data- och systemvetenskap; Electricity markets; Environmental policy; Game theory; Hydropower; Market power; Transmission planning; Q4; Q5; L1; Environmental policy; L94; Market power; Transmission planning; Game theory; D4; Hydropower; D6; C7; Electricity markets
• ISSN: 0140-9883; 1873-6181; 1873-6181
• DOI: 10.1016/j.eneco.2024.107610

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. •The Nordic power sector exhibits market power and incomplete carbon pricing.•Via a Stackelberg model, we show how transmission plans adapt to such distortions.•A first-best transmission plan shares resources to reduce some wind capacity.•Market power by nuclear plants requires more transmission capacity to absorb wind.•Incomplete carbon pricing enhances transmission expansion under perfect competition.