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

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  • Anselm Eicke
  • Tarun Khanna
  • Lion Hirth

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.

Suggested Citation

  • Anselm Eicke & Tarun Khanna & Lion Hirth, 2020. "Locational Investment Signals: How to Steer the Siting of New Generation Capacity in Power Systems?," The Energy Journal, , vol. 41(6), pages 281-304, November.
    • Handle: RePEc:sae:enejou:v:41:y:2020:i:6:p:281-304
    DOI: 10.5547/01956574.41.6.aeic
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    References listed on IDEAS

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    1. Johannes Wagner, 2019. "Grid Investment and Support Schemes for Renewable Electricity Generation," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2).
    2. Joskow, Paul L., 2008. "Capacity payments in imperfect electricity markets: Need and design," Utilities Policy, Elsevier, vol. 16(3), pages 159-170, September.
    3. Nieto, Amparo D. & Fraser, Hamish, 2007. "Locational Electricity Capacity Markets: Alternatives to Restore the Missing Signals," The Electricity Journal, Elsevier, vol. 20(2), pages 10-26, March.
    4. Keller, Katja & Wild, Jorg, 2004. "Long-term investment in electricity: a trade-off between co-ordination and competition?," Utilities Policy, Elsevier, vol. 12(4), pages 243-251, December.
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    6. Holmberg, Pär, 2024. "The Inc-Dec Game and How to Mitigate It," Working Paper Series 1512, Research Institute of Industrial Economics.

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