nep-reg New Economics Papers
on Regulation
Issue of 2013‒09‒24
nine papers chosen by
Natalia Fabra
Universidad Carlos III de Madrid

  1. Can Uncertainty Justify Overlapping Policy Instruments to Mitigate Emissions? By Oskar Lecuyer; Philippe Quirion
  2. Network Neutrality, Access to Content and Online Advertising By Anna D’Annunzio; Antonio Russo
  3. Melting-pots and salad bowls: the current debate on electricity market design for RES integration By Arthur HENRIOT; Jean-Michel GLACHANT
  4. Modeling of Emission Allowance Markets: A Literature Review By Vincent Bertrand
  5. A Framework for Efficient Government Investment By Andrew M. Warner
  6. Stability analysis of a model for the market dynamics of a smart grid By F. Sorrentino; D. Tolic; R. Fierro; J. R. Gordon; A. Mammoli
  7. Statistical description of the error on wind power forecasts via a Lévy α-stable distribution By Kenneth Bruninx; Erik Delarue; William D’haeseleer
  8. Optimal Power Generation Investment: Impact of Technology Choices and Existing Portfolios for Deploying Low-Carbon Coal Technologies By Rohlfs, Wilko; Madlener, Reinhard
  9. Equilibria in Health Exchanges: Adverse Selection vs. Reclassification Risk By Benjamin R. Handel; Igal Hendel; Michael D. Whinston

  1. By: Oskar Lecuyer; Philippe Quirion
    Abstract: This article constitutes a new contribution to the analysis of overlapping instruments to cover the same emission sources. Using both an analytical and a numerical model, we find that when the risk that the CO2 price drops to zero and the political unavailability of a CO2 tax (at least in the European Union) are taken into account, it can be socially beneficial to implement an additional instrument encouraging the reduction of emissions, for instance a renewable energy subsidy. Our analysis has both a practical and a theoretical purpose. It aims at giving economic insight to policymakers in a context of increased uncertainty concerning the future stringency of the European Emission Trading Scheme. It also gives another rationale for the use of several instruments to cover the same emission sources, and shows the importance of accounting for corner solutions in the definition of the optimal policy mix
    Keywords: Uncertainty, Policy overlapping, Mitigation policy, Energy policy, EU-ETS, Renewable energy, Corner solutions, Nil CO2 price, European Union
    JEL: Q28 Q41 Q48 Q58
    Date: 2013
  2. By: Anna D’Annunzio; Antonio Russo
    Abstract: We investigate possible effects of network neutrality regulation on the distribution of content in the Internet. We model a two-sided market, where consumers and advertisers interact through Content Providers (CPs), and CPs and consumers through Internet Service Providers (ISPs). Multiple impressions of an ad on a consumer are partially wasteful. Thus, equilibrium ad rates decrease with the number of CPs consumers can browse. Under network neutrality, CPs can connect to any ISP for free, while in the unregulated regime they have to pay a (non-discriminatory) access fee set by the ISP.We show that universal distribution of content is always an equilibrium with net neutrality regulation. Instead, in the unregulated regime, ISPs can use access fees to rule out universal distribution when it is not profitable, i.e. when repeated impressions of an ad rapidly lose value and consumers care for content availability to a small extent. We also find that the unregulated regime is never superior to net neutrality from a welfare point of view. Consumer and advertiser surplus are weakly higher under net neutrality. ISPs are unambiguously better off in the unregulated regime, while CPs are unambiguously worse off.
    Keywords: Network neutrality, two-sided markets, Internet, advertising, fragmentation
    JEL: L1 D43 L13 L51
    Date: 2013–07
  3. By: Arthur HENRIOT; Jean-Michel GLACHANT
    Abstract: This paper discusses a series of Numbers regarding the economic integration of intermittent renewables into European electricity markets. This debate has gained in importance following the large-scale deployment of wind farms and photovoltaic panels. As intermittent renewables constitute a significant share of the installed generation capacity, they cannot be kept isolated from the electricity markets. We argue that RES integration is first and foremost an Number of economic efficiency, and we review the main debates and frameworks that have emerged in the literature. We first consider to what extent intermittent resources should be treated the same way as dispatchable resources. We then analyse the different tools that have been proposed to ensure the required flexibility will be delivered: finer temporal granularity and new price boundaries, integration of a complex set of balancing markets, and introduction of tailor-made capacity remuneration mechanisms. Finally we introduce the topic of space redistribution, confronting cross-continental markets integration to the emergence of a mosaic of local markets.
    Keywords: Electricity market design, large-scale renewables, intermittency
    Date: 2013–07
  4. By: Vincent Bertrand
    Abstract: This paper reviews the development of emission trading models from the earliest to recent contributions. First, we introduce the economics of pollution control and the origins of emission trading. We give a brief description of policy instruments for the control of pollution, and explain why economic instruments (Pigouvian tax and emission trading) produce better results than “command-and-control” approaches. Second, we review several papers on modeling of emission trading systems, with a focus on dynamic models in case of perfect competition. We begin with the earliest static models, investigating a number of factor that can affect the effectiveness of emission trading (e.g. market power, transaction-costs, political pressures, etc). Next, we present dynamic models of permit markets, analysing questions such as banking/borrowing, relationship between spot and future markets, exogenous factors influencing the marginal abatement cost, etc. Finally, we end the paper with recent studies that model the main features of the European Emission Trading Scheme (EU ETS) in a dynamic framework with stochastic emissions.
    Keywords: Emission Trading, EU ETS, Partial Equilibrium Modeling
    Date: 2013
  5. By: Andrew M. Warner
    Abstract: Welfare economics, scope and performance of government, externalities, public goods, cost-benefit analysis, subsidies economize on spending without losing effectiveness by modifying the conceptual framework guiding state expenditures. The familiar framework says that state intervention is justified when the spending provides public goods or when the intervention addresses externalities, provided the social return is above a threshold. This paper argues that another consideration needs to be brought into the mix - whether, in spite of the externalities, the private sector has an incentive to undertake the activity. It is argued that these two considerations together define a more efficient framework under which to justify state intervention. According to this modified framework, even a benign state interested in social welfare would not in fact address every externality nor necessarily select expenditures with the highest social returns. These points are summarized in a graph which is then used to analyze policy rules, subsidies and effective interaction between the state and the private sector. It is hoped that this paper points to the kind of information that needs to be collected and acted upon so that states may achieve their goals more effectively.
    Keywords: Public investment;Private sector;Government expenditures;Subsidies;Welfare economics, scope and performance of government, externalities, public goods, cost-benefit analysis, subsidies
    Date: 2013–02–28
  6. By: F. Sorrentino; D. Tolic; R. Fierro; J. R. Gordon; A. Mammoli
    Abstract: We consider the dynamics of a smart grid system characterized by widespread distributed generation and storage devices. We assume that agents are free to trade electric energy over the network and we focus on the emerging market dynamics. We consider three different models for the market dynamics for which we present a stability analysis. We see that stability depends on the specific form of the market dynamics and it may depend on the structure of the underlying network topology. We run numerical simulations that confirm our theoretical predictions. As an example, we test our model for the market dynamics over a real network topology, namely, the Tramway 11 Feeder from New Mexico's power network.
    Date: 2013–09
  7. By: Kenneth Bruninx; Erik Delarue; William D’haeseleer
    Abstract: As the share of wind power in the electricity system rises, the limited predictability of wind power generation becomes increasingly critical for operating a reliable electricity system. In most operational & economic models, the wind power forecast error (WPFE) is often assumed to have a Gaussian or so-called ï¢-distribution. However, these distributions are not suited to fully describe the skewed and heavy-tailed character of WPFE data. In this paper, the Lévy ï¡-stable distribution is proposed as an improved description of the WPFE. Based on 6 years of historical wind power data, three forecast scenarios with forecast horizons ranging from 1 to 24 hours are simulated via a persistence approach. The Lévy ï¡-stable distribution models the WPFE better than the Gaussian or so-called ï¢-distribution, especially for short term forecasts. In a case study, an analysis of historical WPFE data showed improvements over the Gaussian and ï¢-distribution between 137 and 567% in terms of cumulative squared residuals. The method presented allows to quantify the probability of a certain error, given a certain wind power forecast. This new statistical description of the WPFE can hold important information for short term economic & operational (reliability) studies in the field of wind power.
    Keywords: Error analysis, Lévy a-stable distribution, Statistical analysis, Stable process, Wind power forecasting, Wind power generation
    Date: 2013–07
  8. By: Rohlfs, Wilko (RWTH Aachen University); Madlener, Reinhard (E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN))
    Abstract: In this paper we identify optimal strategies for the investment in power generation assets. The investments are characterized by multiple available technologies whose economic value is driven by a technology-specific combination of several underlying assets, such as the price of fuel, electricity, and CO2. The correlation between the development of those underlying assets allows for diversification and thus to reduce the overall risk by holding a portfolio of different technologies. This yields an investor-dependent strategy for the deployment of new energy generation assets. The modeling framework developed is based on stochastic real options analysis that enables to account for the additional value of waiting which arises from uncertain commodity price development. In the presentation, we increase the model’s complexity stepwise, in order to depict the influences of various aspects, as for instance the interaction of technologies, value of waiting, or modification of an existing power plant portfolio. We find that including the value of waiting in the decision process not only delays the investment but also leads to an asymmetric risk distribution which features a much lower probability for losses. In addition, the results where the value of waiting is incorporated are more robust with respect to a variation of the investor’s risk- and time-preferences compared to the results gained with the classical net present value model. Finally, we investigate the required market conditions needed for the deployment of carbon capture and storage (CCS) technologies. We find that a carbon dioxide price of 60 e/tCO2 and an electricity price of 70 e/MWh is required in the year 2015 in order to reach a probability of at least 50% for the deployment of CCS in 2022.
    Keywords: CCS; Real options; Retrofit; Renewable energies
    Date: 2013–08
  9. By: Benjamin R. Handel; Igal Hendel; Michael D. Whinston
    Abstract: This paper studies regulated health insurance markets known as exchanges, motivated by their inclusion in the Affordable Care Act (ACA). We use detailed health plan choice and utilization data to model individual-level projected health risk and risk preferences. We combine the estimated joint distribution of risk and risk preferences with a model of competitive insurance markets to predict outcomes under different regulations that govern insurers' ability to use health status information in pricing. We investigate the welfare implications of these regulations with an emphasis on two potential sources of inefficiency: (i) adverse selection and (ii) premium reclassification risk. We find that market unravelling from adverse selection is substantial under the proposed pricing rules in the Affordable Care Act (ACA), implying limited coverage for individuals beyond the lowest coverage (Bronze) health plan permitted. Although adverse selection can be attenuated by allowing (partial) pricing of health status, our estimated risk preferences imply that this would create a welfare loss from reclassification risk that is substantially larger than the gains from increasing within-year coverage, provided that consumers can borrow when young to smooth consumption or that age-based pricing is allowed. We extend the analysis to investigate some related issues, including (i) age-based pricing regulation (ii) exchange participation if the individual mandate is unenforceable and (iii) insurer risk-adjustment transfers.
    JEL: D82 G22 I11 I13 I18
    Date: 2013–09

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