Optimal Incentive Design for Targeted Penetration of Renewable Energy Sources

Environmental concerns arising from fossil-fuel-based generation have propelled the integration of less-polluting energy sources in the generation portfolio and simultaneously have motivated increased energy conservation programs. In today´s deregulated electricity market, most participants [e.g., GENCOs and local distribution companies (LDCs)] focus on maximizing their profits, and thus they need to be incentivized to invest in renewable generation and energy conservation, which are otherwise not profitable ventures. Therefore, this paper proposes a novel holistic generation expansion plan (GEP) model that enables the central planning authority (CPA) to design optimal incentive rates for renewable integration and energy conservation targets, considering the investor interests and constraints. The model also determines the siting, sizing, timing, and technology required to adequately supply the projected demand over the planning horizon. The model is applied to the generation planning of Ontario, Canada, based on realistic data, to determine appropriate incentives for investors in renewable generation and energy conservation by LDCs. The obtained optimal incentives are shown to be similar to the ones currently in place in Ontario, with a slightly shorter payback period for investors. The effect of uncertainties associated with solar and wind energy availability on the GEP model is also examined using Monte Carlo simulations.