Locational Investment Signals: How to Steer the Siting of New Generation Capacity in Power Systems?

Abstract

New generators located far from consumption centers require transmission infrastructure and increase network losses. The primary objective of this paper is to study signals that affect the location of generation investment. Such signals result from the electricity market itself and from additional regulatory instruments. We cluster them into five groups: locational electricity markets, deep grid connection charges, grid usage charges, capacity mechanisms, and renewable energy support schemes. We review the use of instruments in twelve major power systems and discuss relevant properties, including a quantitative estimate of their strength. We find that most systems use multiple instruments in parallel, and none of the identified instruments prevails. The signals vary between locations by up to 20 EUR per MWh. Such a difference is significant when compared to the levelized costs of combined cycle plants of 64-72 EUR per MWh in Europe.

Locational (In-)Efficiency of Renewable Power Generation Feeding in the Electricity Grid: A Spatial Regression Analysis

“…We apply the two-step Heckit sample selection model once for the installed capacity of the power plants (in MW) and once for the generated electricity (in GWh). (Eicke et al, 2019). The former comprise single payments to the SO for connecting the power plant.…”

“…Such fees are charged per unit of generated electricity. Different mechanisms, which are not applied in Germany but in other countries, are locational marginal pricing and market splitting (Eicke et al, 2019).…”

Renewable Energy Zones in Australia's National Electricity Market

“…This is driving demand for costly transmission infrastructure, ancillary services, rising network congestion and greater Market Operator intervention (Neuhoff et al, 2013;Bird et al, 2016;Neuhoff et al, 2016;Bertsch et al, 2017;Joos and Staffell, 2018;Ambrosius et al, 2019;Wagner, 2019;Heptonstall and Gross, 2020;Simshauser and Gilmore, 2020;Pollitt and Anaya, 2021). The coordination of generation and transmission investment is therefore of rising interest (van der Weijde and Hobbs, 2012;Munoz et al, 2017;Pechan, 2017;AEMC, 2019;Ambrosius et al, 2019;Eicke et al, 2020).…”

“…There should be no doubt a nodal market of the type envisaged by Schweppe et al, (1988) will outperform a zonal market design from a dispatch efficiency perspective (Bjørndal and Jørnsten, 2001;Joskow, 2008;van der Weijde and Hobbs, 2011;Neuhoff et al, 2013;Holmberg and Lazarczyk, 2015). That is, a primary benefit of nodal pricing is generally considered to be dispatch efficiency given varying unit fuel costs (Green, 2007;Joskow, 2008;Eicke et al, 2020). Although as one Reviewer noted this does hinge on how losses are treated in nodal markets, viz.…”

“…Whether nodal market signals outperform zonal markets vis-à-vis generation investment locational decisions is more nuanced. There is a general lack of evidence that such markets impact the efficiency of future network investment, noting congestion rents form a small fraction of required transmission augmentation capital costs (Eicke, Khanna and Hirth, 2020).…”