The location of (renewable) generation investments matters and will matter more, as we progress towards higher shares of variable renewables. Therefore, remuneration schemes or complementary policies should provide locational signals to investors in RES and balancing re-sources so as to promote system efficiency and reliability.


In the power system, the location of generation capacities has never been unimportant, except if one assumes unlimited electricity transmission capacities, with negligible transmission losses and costs. In fact, at any given time, transmission capacities are limited: bottlenecks exist and are becoming more relevant and frequent, due to the addition of large wind and solar capacities, often concentrated in regions with a weak grid.

While the costs of transmission are relatively low, the main limiting factors for grid expansion are currently permission, planning and public acceptance, which de facto may limit the prospects for grid expansion. This means that bottlenecks are in certain cases likely to remain over a much longer period of time than would be reasonable from a purely economic point of view.

If no locational signals are provided, investors tend to concentrate variable renewable capacities in the areas with the best wind or solar resources and the lowest development and construction costs. Small PV is built mainly in areas where there are people willing and able to invest, and where roofs are available. Thus, renewables with similar generation profiles tend to be concentrated in the same areas, as for instance in Germany, with wind close to the coast and solar largely in the south.

Such an unstructured concentration makes sense in the first stages of deployment, as the costs of integration are still negligible or low. However, when variable renewable capacities increase, additional aspects need to be considered. For instance, adding 1 MW of PV in a local grid area that is already close to oversupply at noon in summer (for instance in some strong PV locations in Southern Italy) may make less sense than 1 MW of PV in an area where its output can always be absorbed at negligible integration costs, even if the solar radiation is lower (for instance in urban areas of Northern Italy). Also from the point of view of social acceptance and landscape protection, an excessive concentration of large-scale wind or solar in the same region may be detrimental.

Therefore, steering the location of (renewable) generation assets can become more and more important as the RES-E shares grow. The rationale and the scope of such a steering may vary from country to country, and depends on how and when the transmission grid is expected to be expanded. However, in the next decade, locational signals will often be necessary and should be provided either by the schemes remunerating the investments, or by other measures such as grid charges, locational wholesale electricity prices, dedicated planning areas or permitting procedures, or rural development policies. However, this should not undermine transmission grid expansion where needed, as this is typically the most economic measure for integrating higher shares of variable renewables into the network.

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