Abstract. The placement of new generators entails a tradeoff: To which extend do lower generation costs merit higher network expenditures? The economic approach to this tradeoff is the internalization of network costs to generators. In zonal electricity markets, examples for a partial internalization are deep grid connection charges, network usage charges, and locational components in renewable support schemes. The objective of this paper is to analyze the effect of optimally designed locational investment signals in a zonal electricity market with suboptimal dispatch incentives. The methodology is a bilevel power market model. In the first stage, the regulator chooses a location- and technology-specific locational investment signal with the aim of maximizing social welfare. It anticipates the second stage in which generators decide on investment and dispatch while accounting for the regulatory locational signal and the zonal electricity price. For an exemplary network, I find that locational investment signals may increase welfare through a better allocation of generators. Yet, the signal’s benefit remains well below the benchmark of a nodal market, in which both dispatch and investment incentives are optimal. I also show that the optimal siting of generators in a zonal market is closer to consumers than it would be in a nodal market. This is due to the additional network management costs resulting from the suboptimal zonal market clearing.

Awarded with the Best Paper Award at the IEWT 2021 (Link)

back to publications