Integrating local market operations into transmission investment: A tri-level optimization approach

Abstract

The rise of Local Energy Markets (LEMs) and increasing local flexibility present a key research question: How do local flexibility and LEM operations impact merchant-regulated transmission investments? This paper introduces a novel tri-level framework to integrate local market dynamics into transmission investment decisions. The framework models the sequential operations of the WSM and LEMs, adhering to their respective network constraints, and includes a regulatory mechanism that incentivizes profit-driven Transmission Companies (Transcos) to make social welfare maximizing investments while accounting for local refinement costs. The tri-level optimization problem is asymptotically approximated by a mixed-integer second-order cone programming problem. Our findings from three case studies reveal that the provision of local flexibility substantially reduces reliance on conventional energy generation supplies. Additionally, transmission investment decisions are influenced by the levels of flexible generation and consumers, while adhering to network constraints. Moreover, the tri-level model enhances Transcos’ awareness of the sequential interactions between the WSM and LEMs, enabling them to make investment strategies that are responsive to the changing dynamics of local markets.