nep-reg New Economics Papers
on Regulation
Issue of 2015‒05‒02
fifteen papers chosen by
Natalia Fabra
Universidad Carlos III de Madrid

  2. Capacity market design options: a dynamic capacity investment model and a GB case study By Daniel Hach; Chi Kong Chyong; Stefan Spinler
  3. The U.S. Electricity Industry After 20 Years of Restructuring By Severin Borenstein; James Bushnell
  4. Integrating Distributed Generation: Regulation and Trends in Three Leading Countries By Karim L. Anaya; Michael G. Pollitt
  5. The Role of Distribution Network Operators in Promoting Cost-Effective Distributed Generation: Lessons from the United States for Europe By Karim L. Anaya; Michael G. Pollitt
  6. Security of Supply, Capacity Auctions and Interconnectors By David Newbery
  7. Targeted carbon tariffs - Carbon leakage and welfare effects By Christoph Böhringer; Brita Bye; Taran Fæhn; Knut Einar Rosendahl
  8. Economic Regulation and Cost-efficiency in Brazilian Urban Public Transport: the Case of Belo Horizonte By Alexandre de Ávila Gomide
  9. The benefits of integrating European electricity markets By David Newbery; Goran Strbac; Ivan Viehoff
  10. Cost trajectories of low carbon electricity generation technologies in the UK: A study of cost uncertainty By Peter G. Levi; Michael G. Pollitt
  11. A theory of optimal green defaults By Meran, Georg; Schwarze, Reimund
  12. Price caps, oligopoly, and entry By Stanley Reynolds; David Rietzke
  13. Welfare and Distributional Implications of Shale Gas By Catherine Hausman; Ryan Kellogg
  14. Energy and the Environment: a cold climate for climate change policies? By Jonathan Colmer; Antoine Dechezleprêtre; Ralf Martin
  15. Strategic investment and international spillovers in natural gas markets By Robert A. Ritz

  1. By: Jon Stern
    Abstract: This paper discusses the changing role of electricity system operators in Britain. Until 2008, the UK electricity system operator was the key co-ordinator for a liberalized electricity generation market. However, since 2008, the British electricity system operator has, under the Energy Market Reform, primarily become a delivery agency for technology-specific generation within a planned electricity system. This paper discusses the transformation in the role of the British electricity system operator since 2008 and analyses the relationship between this change and the development of EU energy and climate change policy. The paper concludes with a discussion of the alternative views of the EU energy policy – the EU Commission has been proposing much increased interconnection to encourage multi-country regional markets, linking those markets into a Single European Electricity Market. Conversely, the UK, Germany and some other Member States have been promoting their national markets based on large-scale investment on national renewables with sizeable budgetary subsidies, supported by capacity payments. The role of the national electricity system operator is central to this debate with its functions very different in the two models.
    Keywords: System operator, climate change policy, electricity liberalization, renewable generation, EU energy policy
    JEL: L94 K23 H76
    Date: 2015–04–20
  2. By: Daniel Hach; Chi Kong Chyong; Stefan Spinler
    Abstract: Rising feed-in from renewable energy sources decreases margins, load factors, and thereby profitability of conventional generation in several electricity markets around the world. At the same time, conventional generation is still needed to ensure security of electricity supply. Therefore, capacity markets are currently being widely discussed as a measure to ensure generation adequacy in markets such as France, Germany, and the United States (e.g., Texas), or even implemented for example in Great Britain. We assess the effect of different capacity market design options in three scenarios: 1) no capacity market, 2) a capacity market for new capacity only, and 3) a capacity market for new and existing capacity. We compare the results along the three key dimensions of electricity policy – affordability, reliability, and sustainability. In a Great Britain case study we find that a capacity market increases generation adequacy since it provides incentives for new generation investments. Furthermore, our results show that a capacity market can lower the total bill of generation because it can reduce lost load and the potential to exercise market power. Additionally, we find that a capacity market for new capacity only is cheaper than a capacity market for new and existing capacity because it remunerates fewer generators in the first years after its introduction.
    Keywords: Capacity mechanism, capacity market, dynamic capacity investment model, generation adequacy, conventional electricity generation investment, renewable energy sources
    JEL: Q48 L94 L98 C44 D81
    Date: 2015–04–20
  3. By: Severin Borenstein; James Bushnell
    Abstract: Prior to the 1990s, most electricity customers in the U.S. were served by regulated, vertically-integrated, monopoly utilities that handled electricity generation, transmission, local distribution and billing/collections. Regulators set retail electricity prices to allow the utility to recover its prudently incurred costs, a process known as cost-of-service regulation. During the 1990s, this model was disrupted in many states by "electricity restructuring," a term used to describe legal changes that allowed both non-utility generators to sell electricity to utilities — displacing the utility generation function — and/or "retail service providers" to buy electricity from generators and sell to end-use customers — displacing the utility procurement and billing functions. We review the original economic arguments for electricity restructuring, the potential winners and losers from these changes, and what has actually happened in the subsequent years. We argue that the greatest political motivation for restructuring was rent shifting, not efficiency improvements, and that this explanation is supported by observed waxing and waning of political enthusiasm for electricity reform. While electricity restructuring has brought significant efficiency improvements in generation, it has generally been viewed as a disappointment because the price-reduction promises made by some advocates were based on politically-unsustainable rent transfers. In reality, the electricity rate changes since restructuring have been driven more by exogenous factors — such as generation technology advances and natural gas price fluctuations — than by the effects of restructuring. We argue that a similar dynamic underpins the current political momentum behind distributed generation (primarily rooftop solar PV) which remains costly from a societal viewpoint, but privately economic due to the rent transfers it enables.
    JEL: L51 L94 L97
    Date: 2015–04
  4. By: Karim L. Anaya; Michael G. Pollitt
    Abstract: We explore trends in the deployment and integration of distributed generation in Germany, Denmark and Sweden. In particular, we examine the regulation of renewable energy generation with a focus on grid access and connection mechanisms. The high rate of distributed generation penetration in these countries is the result of early support given to the expansion of renewable energy generation – mainly wind and solar - within their respective national policies. Germany and Denmark are the countries with the most sophisticated support schemes, which have shown changes over time. In terms of connections, Germany is the country with the most favourable connection regime. It provides not only priority connection but also priority use of the grid to generation units that produce electricity from renewable energy sources. Sweden guarantees equal treatment among different technologies (i.e. a non-discrimination principle) and is thus the least favourable. High connection costs have been observed, especially in Germany and Denmark. The costs of network upgrades are usually socialised across customers. The use of smart solutions combined with novel business models might allow more efficient use of the current distribution electricity infrastructure. Hence, integration issues should be taken into consideration in order to avoid expansion of distributed generation in a way that unnecessarily raises total system costs, via high connection costs.
    Keywords: distributed generation, renewable energy, support schemes, connection arrangements
    JEL: H25 L94 L98 Q48
    Date: 2014–04–20
  5. By: Karim L. Anaya; Michael G. Pollitt
    Abstract: We explore the different competitive mechanisms applied by electric utilities from the USA in promoting cost-effective Distribution Generation (DG) resources and the challenges that they face due to the increase in DG connections. Case studies from California, Oregon, Colorado and New York are discussed. The case studies refer to two kinds of competitive mechanisms: Request for Proposals (RFP) and auctions (Renewable Auction Mechanism). The study proposes an auction design with a focus on the UK context and examines the role of energy regulators in auction mechanisms. We think that the experience described in the four case studies can be replicated by Distribution System Operators (DSOs) in Europe, however unbundling rules established in the EC third package need to be taken into consideration.
    Keywords: electricity auctions, distributed generation, renewable energy, third energy package
    JEL: D44 L51 L94 Q28 Q48
    Date: 2014–04–20
  6. By: David Newbery
    Abstract: Energy policy aims to deliver security, sustainability and affordability, but politicians treat security of supply as over-riding. Absent market and regulatory failures, liberalized energy-only electricity markets might deliver adequate capacity. Ambitious targets for subsidized renewables and policy uncertainty have undermined the commercial case for the investment needed to handle increased intermittency and raised concerns for capacity adequacy. In response Britain now holds annual capacity auctions. The paper examines the case for, criticisms of, and the outcome of the first auction, criticizing the decision to ignore the contribution that interconnectors make to security of supply.
    Keywords: capacity markets, renewables, procurement volume, interconnectors
    JEL: L94 D44
    Date: 2015–04–21
  7. By: Christoph Böhringer (Carl von Ossietzky Universität Oldenburg, Institut für Volkswirtschaftslehre & ZenTra); Brita Bye (Statistics Norway, Research Department); Taran Fæhn (Statistics Norway, Research Department); Knut Einar Rosendahl (Norwegian University of Life Sciences, School of Economics and Business)
    Abstract: Climate effects of unilateral carbon policies are undermined by carbon leakage. To counteract leakage and increase global cost-effectiveness carbon tariffs can be imposed on the emissions embodied in imports from non-regulating regions. We present a theoretical analysis on the economic incentives for emission abatement of producers subjected to carbon tariffs. We quantify the impacts of different carbon tariff designs by an empirically based multi-sector, multi-region CGE model of the global economy. We find that firm-targeted tariffs can deliver much stronger leakage reduction and higher efficiency gains than tariff designs operated at the industry level. In particular, because the exporters are able to reduce their carbon tariffs by adjusting emissions, their competitiveness and the overall welfare of their economies will be less randomly and less adversely affected than in previously studied carbon tariff regimes. This beneficial distributional impact could facilitate a higher degree of legitimacy and legality of carbon tariffs.
    Keywords: carbon leakage, border carbon adjustment, carbon tariffs, computable general equilibrium (CGE)
    JEL: Q43 Q54 H2 D61
    Date: 2015–04
  8. By: Alexandre de Ávila Gomide
    Abstract: The transport economics literature has indicated that introduction of competition for the market in urban bus services (i.e. by means of competitive bidding) could promote cost-efficiency with low fares and better quality services. Therefore, this paper analyse the main outcomes and the latest consequences of the bidding process occurred during 1997-1998 in Belo Horizonte with the use of operational data. Did economic efficiency improve? Did fares decrease? This case study concludes that contracting-out bus services through a bidding process is not enough to ensure company cost-efficiency if public authorities do not implement a well-devised competitive tendering process and do not design an effective regulatory framework. We hope that this study can help policy makers to improve future bidding processes in Brazilian cities and to design an effective regulatory model for the urban bus sector, especially in these days where the media have made known the critical situation endured by the urban poor, which have no conditions to afford the costly fare levels of the public transport services.
    Date: 2015–01
  9. By: David Newbery; Goran Strbac; Ivan Viehoff
    Abstract: The European Commission’s Target Electricity Model aims to integrate EU electricity markets. This paper estimates the potential benefit to the EU of coupling interconnectors to increase the efficiency of trading day-ahead, intra-day and sharing balancing services efficiently across borders. Further gains are possible by eliminating unscheduled flows and avoiding the curtailment of renewables with better market design. In the short run the gains could be as high as €3.3 billion/yr, more than 100% of the current gains from trade. About one-third of this total comes from day-ahead coupling and another third from shared balancing.
    Keywords: electricity market coupling, interconnectors, balancing, benefits
    JEL: D61 F15 L51 L94
    Date: 2015–04–21
  10. By: Peter G. Levi; Michael G. Pollitt
    Abstract: Cost uncertainty has latterly come to be presented in the UK’s Department of Energy and Climate Change (DECC) Levelised Cost of Electricity (LCOE) estimates using sensitivities; ‘high’ and ‘low’ figures presented alongside central estimates. This presentation of uncertainty is limited in its provision of context, and of an overall picture of how costs and uncertainty vary over time. Two analyses are performed using the published DECC cost estimates for three electricity generation technologies – nuclear, offshore wind and Carbon Capture and Storage (CCS). The first analysis analyses cost trajectories from selected DECC LCOE estimates and presents them alongside contextual data, resulting in contextual cost landscapes. The second evaluates the associated temporal estimate uncertainty in the decade 2020-2030; an approach aimed at capturing the temporal consistency of estimates, alongside variations in magnitude. Nuclear estimates are found to be both the most consistent and lowest in magnitude. Offshore wind and CCS suffer from comparatively large cost and uncertainty premiums. The implications for the direction of policy are then discussed in the context of conflicting past experience and hidden costs.
    Keywords: cost projections; nuclear; wind power; carbon capture and storage
    JEL: L94
    Date: 2015–04–20
  11. By: Meran, Georg; Schwarze, Reimund
    Abstract: This paper develops an analytical framework for studying the Baumol-Oates efficiency of traditional single instrument abatementpolicies vis-à-vis green defaults in the face of price inertia and deliberate defaultingby subpopulations. In this special case ofbehavioural heterogeneity, command and control approaches can outperform price-based instruments while pure tax/subsidy schemes need tobe adjusted in order to achievepolitically desired levels of abatement. We also prove that choice-preserving nudges are superior to any single-instrument policy in this case. An average marginal abatement cost rule is developed to optimise the green defaults and traditional policies of standards and prices under different degrees of market rigidity.
    JEL: H21 H23 L51 Q52 Q58
    Date: 2015
  12. By: Stanley Reynolds; David Rietzke
    Abstract: We extend the analysis of price caps in oligopoly markets to allow for sunk entry costs and endogenous entry. In the case of deterministic demand and constant marginal cost, reducing a price cap yields increased total output, consumer welfare, and total welfare; results consistent with those for oligopoly markets with a fixed number of firms. With deterministic demand and increasing marginal cost these comparative static results may be fully reversed, and a welfare-improving cap may not exist. Recent results in the literature show that for a fixed number of firms, if demand is stochastic and marginal cost is constant then lowering a price cap may either increase or decrease output and welfare (locally); however, a welfare improving price cap does exist. In contrast to these recent results, we show that a welfare-improving cap may not exist if entry is endogenous. However, within this stochastic demand environment we show that certain restrictions on the curvature of demand are sufficient to ensure the existence of a welfare-improving cap when entry is endogenous.
    Keywords: Price caps, oligopoly, entry, stochastic demand
    JEL: D21 L13 L51
    Date: 2015
  13. By: Catherine Hausman; Ryan Kellogg
    Abstract: Technological innovations in horizontal drilling and hydraulic fracturing have enabled tremendous amounts of natural gas to be extracted profitably from underground shale formations that were long thought to be uneconomical. In this paper, we provide the first estimates of broad-scale welfare and distributional implications of this supply boom. We provide new estimates of supply and demand elasticities, which we use to estimate the drop in natural gas prices that is attributable to the supply expansion. We calculate large, positive welfare impacts for four broad sectors of gas consumption (residential, commercial, industrial, and electric power), and a negative impact for producers, with variation across regions. We then examine the evidence for a gas-led "manufacturing renaissance" and for pass-through to prices of products such as retail natural gas, retail electricity, and commodity chemicals. We conclude with a discussion of environmental externalities from unconventional natural gas, including limitations of the current regulatory environment. Overall, we find that between 2007 and 2013 the shale gas revolution led to an increase in welfare for natural gas consumers and producers of $48 billion per year, but more data are needed on the extent and valuation of the environmental impacts of shale gas production.
    JEL: D12 L60 L71 Q41 Q53
    Date: 2015–04
  14. By: Jonathan Colmer; Antoine Dechezleprêtre; Ralf Martin
    Abstract: The UK's main political parties have all pledged to combat climate change whatever the result of the general election. Yet according to a new report from the CEP, much of the discussion is largely rhetoric, with limited focus on actionable policy commitments. The report's authors explain how UK climate policy consists of a patchwork of instruments addressing greenhouse gas emissions from a variety of sources and resulting in a diverse menu of carbon prices. And while the country's recent record on cutting carbon emissions seems impressive at first glance, much of it has been a result of the reduction in economic activity in the Great Recession.
    Keywords: energy, climate change, environment, #ElectionEconomics
    Date: 2015–04
  15. By: Robert A. Ritz
    Abstract: This paper presents a game-theoretic analysis of multimarket competition with capacity investments, applied to international gas markets. It identifies a strategic advantage of «focused» pipeline gas producers (e.g., Gazprom) over «diversified» multimarket exporters of liquefied natural gas (e.g., Qatar). Based on this, the paper examines the spillover impacts of the Fukushima nuclear accident onto European gas markets, both in the short- and longer-term. It also discusses Russia’s gas export strategy, especially the 2014 deals with China. More generally, the analysis shows how a less efficient oligopolist can be more profitable, and speaks to policy discussions about «security of supply» in energy markets.
    Keywords: Competitive advantage, corporate diversification, liquefied natural gas (LNG), supply security, strategic investment
    JEL: D43 F12 L25 L95
    Date: 2015–04–21

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