Regionally differentiated network fees to affect incentives for generation investment

Highlights: • Analysis of network/generation investment and operation in a bi-level equilibrium model. • Investment and production under regionally differentiated network fees (g-components). • Comparison of the market solutions to a first-best benchmark. • Quantification of economic effects with data for the German electricity market. • G-components significantly affect locational choice but not welfare or network expansion. -- Abstract: In this paper we propose an equilibrium model that allows to analyze subsidization schemes to affect locational choices for generation investment in electricity markets. Our framework takes into account generation investment decided by private investors and redispatch as well as network expansion decided by a regulated transmission system operator. In order to take into account the different objectives and decision variables of those agents, our approach uses a bi-level structure. We focus on the case of regionally differentiated network fees which have to be paid by generators (a so called g-component). The resulting investment and production decisions are compared to the outcome of an equilibrium model in the absence of such regionally differentiated investment incentives and to an overall optimal (first-best) benchmark. To illustrate possible economic effects, we calibrate our framework with data from the German electricity market. Our results reveal that while regionally differentiated network fees do have a significant impact on locational choice of generation capacities, we do not find significant effects on either welfare or network expansion.