Sustainable Transmission Investment

Abstract

In Chaps. 4–6, we treated operational and investment problems from the perspective of power companies. In particular, these firms’ decisions concern generation-capacity expansion and offerings to the electricity market given a particular transmission network. Consequently, the impact of various environmental policies could be examined while taking into account the physical constraints of the network, which are often paramount to the exertion of market power. However, since some environmental policies, e.g., renewable portfolio standards (RPS), aim to incentivize investment in renewable energy (RE) technologies, either expansions to or reinforcements of the transmission grid are necessary. Yet, as discussed in Chap. 1, the restructured nature of the power sector in most OECD countries means that transmission planning is typically conducted by a welfare-maximizing transmission system operator (TSO), whereas generation expansion and operations are carried out by profit-maximizing power companies. Thus, a credible assessment of policy proposals requires a suitable framework that models this distinction between decision makers’ motives directly. Toward that end, we propose a bi-level modeling approach in this chapter in which a TSO at the upper level makes transmission-expansion decisions while constrained by the generators’ decisions at the lower level. After a discussion of the role of the TSO and a survey of the literature, we develop two types of models. Initially, we formulate a benchmark central-planning model that abstracts from the realities of restructured power sectors to provide first-best policy insights stemming from optimal generation and transmission investment in response to the cost of damage from CO$_2$ emissions. Next, a bi-level modeling approach is taken in which the TSO at the upper level must anticipate the response of industry’s generation-capacity investment and operations. The effectiveness of a carbon tax in inducing socially optimal behavior by industry is investigated. We conclude the chapter with a summary of its content and extensions to the models therein. GAMS codes for implementing the approaches are provided at the end of this chapter.