Econonomics of Energy and Environmental Policy

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(Anti) Competitive Effects of RES Infeed in a Transmission-Constrained Network

Many countries are adding substantial capacities of wind- and solar-based power generation to their portfolios. While ownership of conventional capacities is typically concentrated, renewable energy (RES) is often provided by new, independent producers. Hence, one might expect competitive pressure to increase as RES production is ramped up. However, the best locations for RES are often distant from customers. In this paper we show that an increase of RES infeed in a surplus region might lead to a decline in total generation and consumer surplus in the market if transmission capacities are insufficient. The reason for this somewhat counter-intuitive effect is a switch from an equilibrium in which the market is fully integrated to an equilibrium in which transmission constraints are binding. The resulting fragmentation of the market allows the dominant conventional producers to exploit their local market power more aggressively. We also show that conventional generation and nodal prices may be stochastic even if RES infeed, generation cost and demand are perfectly predictable and known to all market participants.
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Keywords: Renewable energy, Electricity transmission, Capacity constraints, Market power, Endogenous uncertainty

DOI: 10.5547/2160-5890.10.1.fhub

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Published in Volume 10, Number 1 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.


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