Sequential coordination of power generation and network investments: the role of renewable incentives

Abstract

The paper addresses the issue of coordinating renewable and network investments in a context of unstable subsidies. It contributes to the literature by developing a three-stage analytical model to address the network operator investment strategies being either proactive or reactive and considering the sensitivity of investments to future renewable incentives, being uncertain and variable. A dynamic stochastic modeling is used to formalize actors' choices. The study's major results show that proactive operator may cause a loss of welfare compared to reactive operator. This depends on network investment costs and network investments delays, the intensity of support measures of renewable energy and the maturity of renewable technologies. While network operator needs to be proactive, especially if moderate new network investments are expected, our results demonstrate that there exists a threshold level of network investment beyond it being reactive is economically preferable. An assessment of some countries cases confirms our theoretical predictions.