Assessing the Competitiveness of Renewable Power Plants in Iran’s Electricity Market under Renewable Energy Certificates (REC) and Power Plant Fuel Price Reform (PFR): A Stackelberg Game Theory Approach

Document Type : Research Paper

Authors

Department of Economics, Shahid Bahonar University of Kerman, Kerman, Iran.

Abstract

In an electricity market where hidden fuel subsidies have strengthened the position of thermal power plants and the lack of stable support mechanisms has constrained renewable growth, this study evaluates the impact of implementing two complementary policies, Power Plant Fuel Price Reform (PFR) and Renewable Energy Certificates (REC), on the competitiveness of renewable generation units in Iran. A theoretical framework based on Stackelberg game theory is developed, with the thermal plant as leader and the renewable plant as follower. To validate the model, sensitivity analysis and Monte Carlo simulation are employed. Two scenarios are analyzed: competition between a conventional thermal unit and a solar plant, and between a thermal unit and a wind plant. Since a formal REC market has not been established in Iran, REC price is estimated using the Levelized Cost of Electricity Gap (LCOE–Gap) approach, reflecting the difference between renewable costs and expected market price. The results show that PFR raises the marginal cost of thermal generation, reducing its output and profit. REC enhances both output and profitability of renewable units. Combined, these policies shift market share toward renewables, increase consumer surplus, and improve social welfare. These outcomes remain robust across assumptions. The proposed model, with its behavioral clarity and calibrability, provides a tool for designing policy packages that support the transition toward a competitive, low-carbon, and equitable electricity market in Iran and other developing economies.

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Main Subjects

Iranian Journal of Economic Studies
Volume 14, Issue 2 - Serial Number 28
Issue in Progress
2025
Pages 323-373

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History

  • Receive Date: 23 October 2025
  • Revise Date: 20 November 2025
  • Accept Date: 21 November 2025

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