Electricity Planning under Generation Shortage: A Game-Theoretical Framework with Distributed Renewable Energy

Abstract

Electricity planning has shifted from traditional centralized models to approaches that better integrate distributed energy resources, aiming to improve sustainability, electricity access, and supply reliability. Among the different policy tools supporting this transition, Feed-in-Tariff (FiT) schemes have been widely studied to promote renewable investment and consumer participation. While the existing literature on FiT design focuses on developed countries with stable grids, nations suffering from persistent electricity shortages face a very different reality. In countries such as Lebanon, Iraq, and Nigeria, unreliable supply, limited financial resources, weak institutional capacity, and reliance on expensive backup supply make it difficult to apply policies developed for advanced economies. Electricity decisions in these countries are often driven by crisis response, with private renewable initiatives expanding independently from national planning strategies. This highlights the need for energy policies that incorporate the local context. This research focuses on developing suitable FiT and electricity investment policies for countries suffering from generation shortage. A three-stage sequential game-theoretical model is developed in which the electric utility acts as the leader, minimizing total annual cost by deciding on generation capacity investments, network upgrades, the FiT, and old generation supply. The second stage consists of an equilibrium among four aggregate household categories that differ by PV ownership and access to diesel-generator backup, and decide whether to participate in the FiT program. In the third stage, the electric utility sets the electricity price and the maximum allowable feed-in. The model is applied to the Lebanese case study. The results show that, under base-case conditions, the preferred policy combines grid reinforcement with new generation investment to support full household participation and full use of household excess PV, eliminating shortage, diesel-generator reliance, and old generation use. The FiT can also be set below the electricity price while still sustaining participation once the complementary investments are in place. When old generation is imposed, the general direction of the policy is preserved but the outcome becomes less efficient. Under a binding investment budget, grid reinforcement is prioritized first, while broader participation and additional new generation emerge only gradually as financial constraints are relaxed. The main conclusions remain robust under variations in the unit grid-upgrade cost and household demand. These findings offer practical policy insights for Lebanon and other countries facing chronic electricity shortage.