Renewable energy expansion under taxes and subsidies: A transmission operator’s perspective

Abstract

This paper investigates the role of a transmission system operator within a carbon footprint reduction strategy incorporating carbon taxes and renewable energy generation subsidies in the decentralised energy market. This is achieved via an optimisation bi-level model in which a welfare-maximising transmission system operator makes investments in transmission lines at the upper level while considering power market dynamics at the lower level. To account for the deregulated energy market structure, this paper assumes that the generation companies at the lower level make capacity investments as price-takers in perfect competition. Considering alternative transmission infrastructure expansion budgets, carbon emission taxes and monetary incentives for renewable energy generation capacity expansion, the impact of alternative compositions of these factors is analysed against three output factors: the share of renewable energy in the generation mix, total generation amount, and social welfare. The proposed modelling assessment is applied to an illustrative three-node instance and a case study considering a simplified representation of the energy system of the Nordic and Baltic countries. The results highlight that, under certain circumstances, renewable energy generation subsidies may lead to an increase of renewable energy in the generation mix followed by a simultaneous fall in the total generation amount. Nevertheless, when applied together, these three measures demonstrated a positive impact on all output factors within Nordics’ and Baltics’ energy systems. The experiments additionally suggest that considering the high value of the carbon tax does not have an impact on the output factors while the composition of high values of renewable energy generation subsidies and budget for transmission infrastructure expansion has the strongest effect.