<p>Distributed solar generation and demand response can reduce fossil-fueled dispatch, yet their impact depends strongly on the pricing and tariff policies set by the Independent System Operator (ISO) and on network constraints. This paper proposes a bi-level optimization framework to capture the strategic interaction between the ISO and consumers. At the upper level, the ISO maximizes its net utility by co-optimizing fossil generation costs, solar purchase costs, environmental costs, and sales revenues, subject to operating and network limits. At the lower level, consumers minimize their total cost by jointly deciding on solar self-generation, grid consumption, and peak-hour savings (demand response) under the ISO’s prices. The resulting problem is solved using Bender’s decomposition under multiple scenarios, including load growth, unit capacity reduction, and topology changes. Results show that higher consumer solar production reduces reliance on fossil-based generation and increases export capability, reaching the upper bound of 3600 GWh over the study horizon. Price signals for solar and fossil electricity reshape consumption patterns and strengthen peak-hour demand response, while financial incentives increase consumers’ willingness to install solar PV. Sensitivity analyses indicate that reducing a generation unit capacity to 200 GW increases total operating cost by ~ 2% (from $6.970&#xa0;M to $6.986&#xa0;M) due to congestion and redispatch toward higher-cost units. Network topology changes also significantly affect operating costs and the ISO-consumers profits. These findings highlight how coordinated pricing and infrastructure planning can support cost-effective decarbonization and sustainable grid operation.</p>