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on Regulation |
| By: | Walsh, Darragh; Malaguzzi Valeri, Laura; Di Cosmo, Valeria |
| Abstract: | Market power often emerges in wholesale electricity markets. Regulators use several strategies to limit market power: adopting bidding rules, compulsory forward markets and enhancing demand response. We study the case of the Irish Single Electricity Market (SEM), where the market will eliminate strict bidding rules to comply with the European Target Electricity Model. Using the PLEXOS unit-commitment model, we simulate the price that emerges in Cournot competition and find that it is more than 60% higher than in perfect competition. We then study how much the price varies with three measures that influence market power. Limiting thermal generators’ ownership of wind generation does not affect prices. Forcing the largest firm to sell some of its output forward decreases prices, but keeps them well above competitive levels. The most effective measure is an increase in price elasticity of demand, although existing evidence shows that it is hard to achieve. We conclude that regulatory oversight of bids will have to continue, although the Target Model will be associated with limited transparency, creating further challenges. |
| Keywords: | regulation; oligopoly; wind generation; forward contracts; demand response |
| JEL: | L1 L9 |
| Date: | 2016–05–20 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:71502&r=reg |
| By: | Todd Gerarden; W. Spencer Reeder; James H. Stock |
| Abstract: | Coal mined on federally managed lands accounts for approximately 40% of U.S. coal consumption and 13% of total U.S. energy-related CO2 emissions. The U.S. Department of the Interior is undertaking a programmatic review of federal coal leasing, including the climate effects of burning federal coal. This paper studies the interaction between a specific upstream policy, incorporating a carbon adder into federal coal royalties, and downstream emissions regulation under the Clean Power Plan (CPP). After providing some comparative statics, we present quantitative results from a detailed dynamic model of the power sector, the Integrated Planning Model (IPM). The IPM analysis indicates that, in the absence of the CPP, a royalty adder equal to the social cost of carbon could reduce emissions by roughly 3/4 of the emissions reduction that the CPP is projected to achieve. If instead the CPP is binding, the royalty adder would: reduce the price of tradeable emissions allowances, produce some additional emissions reductions by reducing leakage, and reduce wholesale power prices under a mass-based CPP but increase them under a rate-based CPP. A federal royalty adder increases mining of non-federal coal, but this substitution is limited by a shift to electricity generation by gas and renewables. |
| JEL: | Q38 Q54 Q58 |
| Date: | 2016–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22214&r=reg |
| By: | Alberto Pench (Department of Political Sciences, University of Pisa) |
| Abstract: | The paper addresses the problem of information asymmetry between a regulator and the polluting firms and proposes a very simple mechanism where the regulator is free to choose, without communicating in advance to the firms, between two instruments: an effluent fee or a standard: as a result in a real world setting this uncertainty might induce firms to a truthful revelation. Moreover, under the assumption of linear marginal abatement or marginal social damage functions, in many cases the resulting optimal behaviour might be an under reporting for some firms and an over reporting for others so that the resulting marginal aggregate benefit function might be not so far from the true one and the aggregate pollution level attained by the mechanism not so far from optimal. |
| Keywords: | Effluent Fee, Standards, Asymmetric Information, Truthful Revelation |
| JEL: | H23 Q5 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:fem:femwpa:2016.20&r=reg |
| By: | David Newbery |
| Abstract: | Given the agreed urgency of decarbonizing electricity and the need to guide decentralized private decisions, an adequate and credible carbon price appears essential. The paper defines and quantifies the useful concept of the break-even carbon price for mature zero-carbon electricity investments. It appears an attractive alternative given the difficulty of measuring the social cost of carbon, but modelling shows it extremely sensitive to projected fuel prices, the rate of interest, and the capital cost of generation options, all of which are very uncertain. This has important implications, and justifies combining a carbon price floor with suitable long-term contracts for electricity investments. The same sensitivity demonstrated for the break-even carbon price translates into similar sensitivities for marginal abatement cost curves. |
| Keywords: | carbon price, electricity, investment, renewables, marginal abatement cost |
| JEL: | C65 Q42 Q48 Q51 Q54 |
| Date: | 2016–02–24 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:1614&r=reg |
| By: | Distante, Roberta; Verdolini, Elena; Tavoni, Massimo |
| Abstract: | We empirically assess the distributional impacts and welfare effects of policies to incentivize renewable electricity production for the case of Italy. We use data from the Household Budget Survey between 2000 and 2010 to estimate a demand system in which energy goods' shares of expenditure are modelled using different empirical approaches. We show that the general Exact Affine Stone Index (EASI) demand system provides more robust estimates of price elasticities of each composite good than the commonly used Almost Ideal Demand System (AIDS). The estimated coefficients are used to perform a welfare analysis of the Italian renewable electricity production incentive policy. We show that different empirical approaches give rise to significantly different estimates of price elasticities and that methodological choices are the reasons for the very high elasticities of substitutions estimated using similar data by previous contributions. We find no evidence of regressivity of the incidence of the Italian renewable incentive scheme in the period under consideration. The renewable subsidies act as a middle-class tax, with the higher welfare losses experienced by households in the second to fourth quintiles of the expenditure distribution. |
| Keywords: | Energy Taxes, Consumer Demand System, Welfare Effects, Equity, Resource /Energy Economics and Policy, D12, H22, Q48, |
| Date: | 2016–05–26 |
| URL: | http://d.repec.org/n?u=RePEc:ags:feemmi:236238&r=reg |
| By: | Genoese, Fabio; Drabik, Eleanor; Egenhofer, Christian |
| Abstract: | By 2030, half of the EU’s electricity demand will be covered by renewables and will need to be accompanied by flexible conventional back-up resources. Due to the high upfront costs inherent to renewables and the progressively lower running times associated with back-up capacity, the cost of capital will have a proportionately greater impact on total costs than today. This report examines how electricity markets can be designed to provide long-term price signals, thereby reducing the cost of capital for these technologies and allowing for a more efficient transition. It finds that current market arrangements are unable to provide long-term price signals. To address this issue, we argue that a system for long-term contracts with a regulated counterparty could be implemented. A centralised system where capacity or energy or a combination of both is contracted, could be introduced for conventional and renewable capacity, based on a regional adequacy assessment and with a competitive bidding system in place to ensure cost-effectiveness. Member states face a number of legislative barriers while implementing these types of systems, however, which could be reduced by merging legislation and setting EU framework rules for the design of these contractual agreements. |
| Date: | 2016–04 |
| URL: | http://d.repec.org/n?u=RePEc:eps:cepswp:11539&r=reg |
| By: | Buck, Steven; Nemati, Mehdi; Sunding, David |
| Abstract: | In response to the severe California drought, in April 2015, Governor Jerry Brown issued an executive order mandating statewide reductions in water use. The mandate aimed to reduce the amount of water consumed statewide in urban areas by 25% from 2013 levels. The State Water Resources Control Board (SWRCB) proposed regulatory instructions that grouped urban water utilities into nine tiers, with conservation standards ranging from 8% to 36%. In this paper we evaluate welfare losses caused by this mandate. Understanding the proposed regulation’s welfare losses requires estimating water demand. Using fixed effect models and data from 2004 to 2009 on 111 urban water utilities, an annual demand curve is estimated. The estimated demand elasticity is between -0.61 and -0.1 which is heterogeneous across the regions and seasons. In the second step, we use the estimated annual demand function to recover price elasticities for a sample of 53 urban water utilities in California, which provide water for more than 20 million customers. We considered two scenarios to calculate welfare losses in Northern and Southern California: the governor’s mandate, and a hypothetical 25% uniform cut back. The results for Northern California indicate an average welfare loss of $6,132 per acre-foot of shortage for a governor’s mandate and $4,424 for a 25% uniform shortage. In Southern California, the average estimated welfare loss is $2,113 per acre-foot of shortage for a governor’s mandate and $2,171 for a 25% uniform shortage. Results indicate the monthly household-level willingness-to-pay to avoid the governor’s mandate is $36 in Northern California and $25 in Southern California. |
| Keywords: | California, demand, government policy, urban water utilities, water supply shortage, Consumer/Household Economics, Demand and Price Analysis, Public Economics, Resource /Energy Economics and Policy, D61, L95, Q25, Q28, Q58, |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea16:236049&r=reg |
| By: | Francisco Castellano; Michael G. Pollitt |
| Abstract: | Multiple market drivers suggest that electrical energy storage (EES) systems are going to be essential for future power systems within the next decade. However, the deployment of the technology is proceeding at very different rates around the world. Whereas the sector is progressing quickly in California, it is not gaining much traction, so far, in Europe. This research aims to clarify why the prospects for energy storage in Europe are not as good as they are in California. The market and regulatory framework in California and Europe are analysed critically, and changes to overcome the main barriers are recommended. The research shows that the main barriers are: inadequate definition and classification of EES in legislation; lack of markets for some ancillary services; inadequate market design that benefits traditional technologies; and the lack of need for EES in some jurisdictions. The prospects are better in California because regulation is more advanced and favourable for the technology, and regulators are collaborating with developers and utilities to analyse barriers and solutions for the technology. In Europe, there is a need to clarify the definition of EES, create new markets for ancillary services, design technology-neutral market rules and study more deeply the necessity of EES. |
| Keywords: | electrical energy storage, battery, market design |
| JEL: | L98 |
| Date: | 2016–05–06 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:1629&r=reg |
| By: | Arjun Mahalingam; David Reiner |
| Abstract: | From 2005-2012, Spain and Italy saw significant investment in renewable energy, most notably in onshore wind and solar, driven by generous subsidies, the expectation of rising carbon prices and falling renewables (especially solar panel) costs. As a result of the Global Financial Crisis, both countries were faced with massive fiscal deficits and were forced to curtail their renewable support schemes, although these efforts took several years to take effect after the onset of the initial crisis. Ironically, both Spain and Italy incurred the lion’s share of their liability for renewables support after the onset of the crisis particularly because of the rapid drop in costs of solar PV panels, while subsidy levels remained high. In spite of changes to their support regimes, Italy is likely to meet its 2020 climate and renewable targets, whereas Spain is unlikely to meet its 2020 renewables target based on current trajectories. Following a comparative historical survey of the two large EU member states, we present a scenario analysis that contrasts alternative futures of 2030 where renewable support remain at current levels (essentially zero) or is revived and where carbon prices stay at current low levels (€5/t CO2) or rises to levels needed to accomplish the proposed 40% EU 2030 reduction target. We find that, by 2030, in large parts of Spain, solar PV will be cost-competitive even under low-carbon price and low renewable support regimes, whereas concentrated solar power (CSP) and onshore wind, will require at least either a sustained renewable support regime or a high carbon price to become cost competitive. In Italy, solar PV becomes cost competitive in the low-carbon, low-renewable support scenario except when fossil fuel prices are unusually low. By 2030, there would be large-scale penetration of onshore wind and geothermal in Italy if there is either a high-carbon price or a high renewable support regime or both. In general, if the current levels of carbon price were to exist post-2020, both Italy and Spain would find it rather difficult to increase the penetration of renewables in their electricity mix. A high subsidy world, on the other hand, would be result in the most favourable outcome, particularly for Spain, although it may incur additional costs in comparison to a high carbon price world. |
| Keywords: | Renewable energy; Electricity; Scenarios; Subsidies; EU energy and climate policy, Spain; Italy |
| JEL: | H23 Q42 N74 O13 Q28 |
| Date: | 2016–02–12 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:1608&r=reg |
| By: | Scheitrum, Daniel P.; Parker, Nathan C. |
| Abstract: | Natural gas is a growing portion of transportation fuel consumed in California. While, natural gas has a slight environmental benefit relative to the use of conventional liquid fuels such as gasoline and diesel, the environmental performance of natural gas can be greatly improved by procuring the gas from renewable sources. We estimate the supply curves of producing natural gas from four renewable sources: (1) dairy manure, (2) municipal solid waste, (3) wastewater treatment plants, and (4) landfill gas. We also evaluate how the production of RNG will respond to California's Low Carbon Fuel Policy (LCFS) and compare the welfare impacts of the LCFS policy to an equivalent carbon tax. |
| Keywords: | Natural Resource Economics, Environmental Policy, Food and Agricultural Policy, Carbon Emissions, Agricultural and Food Policy, Environmental Economics and Policy, Livestock Production/Industries, Resource /Energy Economics and Policy, |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea16:235883&r=reg |
| By: | Marc A. C. Hafstead; Roberton C. Williams III |
| Abstract: | This paper analyzes the effects of environmental policy on employment (and unemployment) using a new general-equilibrium two-sector search model. We find that imposing a pollution tax causes substantial reductions in employment in the regulated (polluting) industry, but this is offset by increased employment in the unregulated (nonpolluting) sector. Thus the policy causes a substantial shift in employment between industries, but the net effect on overall employment (and unemployment) is small, even in the short run. An environmental performance standard causes a substantially smaller sectoral shift in employment than the emissions tax, with roughly similar net effects. The effects on the unregulated industry suggest that empirical studies of environmental regulation that focus only on regulated firms can be misleading (and those that use nonregulated firms as controls for regulated firms will be even more misleading). The paper’s results also suggest that overall effects on employment are not a major issue for environmental policy, and that policymakers who want to minimize sectoral shifts in employment might prefer performance standards over environmental taxes. |
| JEL: | E24 H23 J64 Q52 Q58 |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22269&r=reg |
| By: | Laura-Lucia Richter; Michael G. Pollitt |
| Abstract: | This paper considers the heterogeneity of household consumer preferences for electricity service contracts in a smart grid context. The analysis is based on original data from a discrete choice experiment on smart electricity service contracts that was designed and conducted in collaboration with Accent and 1,892 UK electricity consumers in 2015. The results suggest that while customers are willing to pay for technical support services, they are likely to demand significant compensation to share their usage and personally identifying data and to participate in automated demand response programs. Based on these findings potential platform pricing strategies that could incentivise consumers to participate in a smart electricity platform market are discussed. By combining appropriate participation payments with sharing of bill savings, service providers could attract the number of customers required to provide the optimal level of demand response. We also examine the significant heterogeneity among customers to suggest how, by targeting customers with specific characteristics, smart electricity service providers could significantly reduce their customer acquisition costs. |
| Keywords: | Discrete Choice Experiment, smart energy, Willingness-to-Accept, platform markets |
| JEL: | C18 C38 D12 L94 Q42 Q55 |
| Date: | 2016–05–16 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:1632&r=reg |
| By: | Shouro Dasgupta (Fondazione Eni Enrico Mattei (FEEM) and CMCC); Enrica De Cian (Fondazione Eni Enrico Mattei (FEEM) and CMCC); Elena Verdolini (Fondazione Eni Enrico Mattei (FEEM) and CMCC) |
| Abstract: | This paper empirically investigates the effects of environmental policy, institutions, political orientation, and lobbying on energy innovation and finds that they significantly affect the incentives to innovate and create cleaner energy efficient technologies. We conclude that political economy factors may act as barriers even in the presence of stringent environmental policy, implying that, to move towards a greener economy, countries should combine environmental policy with a general strengthening of institutional quality, consider the influence of government’s political orientation on environmental policies, and the implications of the size of energy intensive sectors in the economy. |
| Keywords: | Energy Innovation, Environmental Policy, Patents, Political Economy |
| JEL: | C23 D02 O30 Q58 |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:fem:femwpa:2016.35&r=reg |