  The impact of energy production significantly affects system sustainability,
which has enabled a shift towards renewable energy sources. Thus, producer
behavior is crucial in electricity markets to achieve sustainability goals. In
this paper, we address two key challenges comprising electricity markets and
generation investment. Firstly, electricity markets typically are operated with
competitive market clearing and merit-order dispatch, which neglects negative
externalities from pollution. A Pigouvian tax is proposed in order to
investigate the impacts of these externalities on electricity prices and
resolve this issue. Secondly, renewable energy sources entail low operational
costs, which result in lower system prices and reduced profits for producers.
Furthermore, producers face high investment costs when moving into renewable
energy resources, which leads to strategic investment decisions. In order to
mitigate this strategic behavior, subsidies are proposed equal to producers'
contribution to consumer surplus. These subsidies incentivize producers to
decrease prices and increase consumer surplus, so, producers would be motivated
to invest in socially optimal generation capacity. Finally, we demonstrate that
implementing the proposed tax and subsidy does not increase the regulator's
information burden.
