Game theory-based analysis of policy instrument consequences on energy system actors in a Nordic municipality

The transition of energy systems requires policy frameworks and instruments to make both energy suppliers and consumers contribute to the common goal of emission reductions and to fairly allocate costs and benefits among market actors and the government. Assuming that market actors - suppliers and consumers adhering to their economic interests - would benefit from cooperating to mitigate emissions, this study applies a game theory-based approach to investigate the interaction between a local electricity supplier and a group of heating consumers not connected to district heating. Selected policy instruments are tested, and their consequences are analyzed in the context of a representative Nordic municipality. The results show that the auction-based Contract for Difference policy instrument is the most suitable one in the studied Nordic context to achieve significant levels of CO2 emissions reduction. It creates a higher level of strategic interaction between the actors, that would be lacking otherwise, under the form of transfer payments from consumers to supplier, and avoids costs to the general taxpayer. While this is sufficient to promote the investments in renewables by the supplier, additional subsidy policies are required to enable the heating consumers to invest in more capital-intensive energy efficiency measures or biomass heating.