Transmission cost allocation: Equilibrium analysis of cost efficiency and environmental tradeoffs

In the shift towards decarbonization, it's crucial to understand how different transmission cost allocation schemes affect investment incentives. In practice, these schemes aim not just for economic efficiency but also fairness, and, in the decarbonization context, these can also support policy objectives that aim at renewable integration and reductions in CO₂ emissions. This study introduces a market equilibrium model and solution approach that can be used to analyze how different network tariff schemes influence investments in generation, energy storage, and transmission. Assuming a competitive market, the model quantifies the long-term effects of network tariffs on investment decisions through an iterative Gauss–Seidel process, achieving market equilibrium. This process ensures transmission costs are fully covered by congestion rents and network tariffs and that generators recover all costs through energy sales. Evaluating outcomes under five network tariff schemes through illustrative and real-world case studies, our findings show the varying impacts of network tariffs on investments in both thermal and low-carbon power systems, and their implications for cost efficiency and CO₂ emissions.