Sustainable Transmission Planning in Imperfectly Competitive Electricity Industries: Balancing economic efficiency and environmental outcomes

Author Name Afzal S. SIDDIQUI (University College London) / TANAKA Makoto (Faculty Fellow, RIETI) / Yihsu CHEN (University of California, Santa Cruz)
Creation Date/NO. March 2017 17-E-024
Research Project Study on Markets and Policies in the Power System Reform
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We explore the role of a transmission system operator (TSO) that builds a transmission line to accommodate renewable energy while attempting to lower emissions. A TSO in a deregulated electricity industry can only indirectly influence outcomes through its choice of the transmission line capacity. Via a bi-level model, we show that this results in less transmission capacity and with limited emissions control in a perfectly competitive industry vis-a-vis a benchmark centrally planned system. Surprisingly, a carbon tax on industry leads to a perfect alignment of incentives and maximized social welfare only under perfect competition. By contrast, a carbon tax actually lowers social welfare under a Cournot oligopoly as the resulting reduction in consumption facilitates the further exercise of market power.

Forthcoming: Siddiqui, Afzal, Makoto Tanaka, and Yihsu Chen. "Sustainable transmission planning in imperfectly competitive electricity industries: Balancing economic and environmental outcomes," European Journal of Operational Research.