Siddiqui, AS; Tanaka, M; Chen, Y; (2019) Sustainable Transmission Planning in Imperfectly Competitive Electricity Industries: Balancing Economic and Environmental Outcomes. European Journal of Operational Research , 275 (1) pp. 208-223. 10.1016/j.ejor.2018.11.032.

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Abstract

We explore the role of a transmission system operator (TSO) that builds a transmission line to accommodate renewable energy in order to lower emissions as required by government policy. In contrast to central planning, 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-à-vis a benchmark centrally planned system. A carbon charge on industry that fully accounts for the cost of pollution damage leads to a perfect alignment of incentives and maximised social welfare only under perfect competition. By contrast, a carbon charge may actually lower social welfare under a Cournot oligopoly as the resulting reduction in consumption facilitates the further exercise of market power.

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