nep-reg New Economics Papers
on Regulation
Issue of 2014‒02‒08
five papers chosen by
Natalia Fabra
Universidad Carlos III de Madrid

  1. Transmission constraints and strategic underinvestment in electric power generation By Léautier, Thomas-Olivier
  2. What explains the short-term dynamics of the prices of CO2 emissions? By Shawkat Hammoudeh; Duc Khuong Nguyen; Ricardo M. Sousa
  3. The "demand side" effect of price caps: uncertainty, imperfect competition, and rationing By Léautier, Thomas-Olivier
  4. A new formulation of the European day-ahead electricity market problem and its algorithmic consequences By MADANI, Mehdi; VAN VYVE, Mathieu
  5. Asymmetric and nonlinear pass-through of energy prices to CO2 emission allowance prices By Shawkat Hammoudeh; Amine Lahiani; Duc Khuong Nguyen; Ricardo M. Sousa

  1. By: Léautier, Thomas-Olivier
    Abstract: This article is the first to examine electric power producers' investment decisions when competition is imperfect and the transmission grid congested. This analysis yields numerous original insights. First, congestion on the grid is transient, and may disappear when demand is highest. Second, transmission capacity increases have complex impacts on generation: they may increase, decrease, or have no impact on the marginal value of generation, and may have similar or opposite impacts on the marginal value of different technologies. Third, the true social value of transmission, including its impact on investment, may be significantly lower than is commonly assumed.
    Keywords: electric power markets, imperfect competition, investment, transmission constraints
    JEL: D61 L11 L94
    Date: 2014–01–06
  2. By: Shawkat Hammoudeh (Drexel University, LeBow College of Business); Duc Khuong Nguyen (IPAG Business School); Ricardo M. Sousa (Universidade do Minho - NIPE)
    Abstract: Using the vector auto-regression (VAR) and the vector error-correction Models (VECM), this paper analyzes the short-term dynamics of the prices of CO2 emissions in response to changes in the prices of oil, coal, natural gas, electricity and carbon emission allowances. The results show that: (i) a positive shock to the crude oil prices has a negative effect on the CO2 allowance prices; (ii) an unexpected increase in the natural gas prices raises the price of CO2 emissions; (iii) a positive shock to the prices of the fuel of choice, coal, has virtually no significant impact on the CO2 prices; (iv) there is a clear positive effect of the coal prices on the CO2 allowance prices when the electricity prices are excluded from the VAR system; and (v) a positive shock to the electricity prices reduces the price of the CO2 allowances. We also find that the energy price shocks have a persistent impact on the CO2 allowance prices, with the largest effect occurring six months after a shock strikes. The effect is particularly strong in the case of the natural gas price shocks. Additionally, we estimate that it takes between 7.3 and 9.6 months to halve the gap between the actual and the equilibrium prices of the CO2 allowances, i.e., to erase any price over- or undervaluations after a shock strikes. Finally, the empirical findings suggest an important degree of substitution between the three primary sources of energy (i.e., crude oil, natural gas and coal), particularly, when electricity prices are excluded from the VAR system.
    Keywords: CO2 allowance prices, crude oil, natural gas, coal, electricity.
    JEL: Q47
    Date: 2014
  3. By: Léautier, Thomas-Olivier
    Abstract: Price caps are often used by policy makers to "regulate markets". Previous analyses have focussed on the "supply side" impact of these caps, and derived the optimal price cap, which maximizes investment and welfare. This article expands the analysis to include the "demand side" impact of price caps: when prices can no longer rise, customers must be rationed to adjust demand to available supply. This yields two new findings, that contradict previous analyses. First, the welfare-maximizing cap is higher than the capacity-maximizing cap, since increasing the cap increases gross surplus when customers are rationed. Second, in somes cases, the capacity-maximizing cap leads to lower capacity and welfare than no cap. These findings underscores the importance for policy makers to examine the impact on customers when they impose price caps.
    Keywords: price caps, imperfect competition, rationing, investment incentives
    JEL: L13 L94
    Date: 2014–01–27
  4. By: MADANI, Mehdi (Université catholique de Louvain, Louvain School of Management, Belgium); VAN VYVE, Mathieu (niversité catholique de Louvain, CORE and Louvain School of Management, Belgium)
    Abstract: A new formulation of the optimization problem implementing European market rules for non- convex day-ahead electricity markets is presented, that avoids the use of complementarity constraints to express market equilibrium conditions, and also avoids the introduction of auxiliary binary variables to linearise these constraints. Instead, we rely on strong duality theory for linear or convex quadratic optimization problems to recover equilibrium constraints imposed by most of European power exchanges facing indivisible orders. When only so-called stepwise preference curves are considered to describe continuous bids, the new formulation allows to take full advantage of state-of-the-art solvers, and in most cases, an optimal solution together with market clearing prices can be computed for large-scale instances without any further algorithmic work. The new formulation also suggests a very competitive Benders-like decomposition procedure, which helps to handle the case of interpolated preference curves that yield quadratic primal and dual objective functions, and consequently a dense quadratic constraint. This procedure essentially consists in strengthening classical Benders cuts locally. Computational experiments on real data kindly provided by main European power exchanges (Apx-Endex, Belpex and Epex spot) show that in the linear case, both approaches are very efficient, while for quadratic instances, only the decomposition procedure is tractable and shows very good results. Finally, when most orders are block orders, and instances are combinatorially very hard, the new MILP approach is substantially more efficient.
    Keywords: Auctions/bidding, market coupling, equilibrium prices, mixed integer programming, large scale optimization
    JEL: C61 D44
    Date: 2014–01–24
  5. By: Shawkat Hammoudeh (Drexel University, LeBow College of Business); Amine Lahiani (University of Orléans and ESC Rennes Business School); Duc Khuong Nguyen (IPAG Business School); Ricardo M. Sousa (Universidade do Minho - NIPE)
    Abstract: We use the recently developed nonlinear autoregressive distributed lags (NARDL) model to examine the pass-through of changes in crude oil prices, natural gas prices, coal prices and electricity prices to the CO2 emission allowance prices. This approach allows one to simultaneously test the short- and long-run nonlinearities through the positive and negative partial sum decompositions of the predetermined explanatory variables. It also offers the possibility to quantify the respective responses of the CO2 emission prices to positive and negative shocks to the prices of their determinants from the asymmetric dynamic multipliers. We find that: (i) the crude oil prices have a long-run negative and asymmetric effect on the CO2 allowance prices; (ii) the falls in the coal prices have a stronger impact on the carbon prices in the short-run than the increases; (iii) the natural gas prices and electricity prices have a symmetric effect on the carbon prices, but this effect is negative for the former and positive for the latter. Policy implications are provided.
    Keywords: CO2 allowance price, energy prices, NARDL model, asymmetric passthrough
    JEL: Q47
    Date: 2014

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