nep-reg New Economics Papers
on Regulation
Issue of 2015‒05‒16
eleven papers chosen by
Natalia Fabra
Universidad Carlos III de Madrid

  1. The Role of Contracting in European Electricity Markets By Neuhoff, Karsten
  2. Beyond Gate Closure By Neuhoff, Karsten; Schwenen, Sebastian
  3. Gas and Electricity Market Design for a Flexible Operation of Gas-fired Power Plants By Neuhoff, Karsten; Ruester, Sophia; Schwenen, Sebastian
  4. CO2 abatement policies in the power sector under an oligopolistic gas market By Hecking, Harald
  5. Design Options for a Strategic Reserve for the German Power Market and International Coordination By Neuhoff, Karsten; Schwenen, Sebastian
  6. Setting the Standard: Commercial Electricity Consumption Responses to Energy Codes By Maya M. Papineau
  7. Dynamics of yardstick regulation: Historical cost data and the ratchet effect By Meya, Johannes
  8. Managing Public Risks Ambiguity, Learning Opportunities, and Risk-Neutral Regulation By Randall, Alan
  9. Energy and Material Efficiency Improvements, Compliance Strategies, and Investments in Resource Efficiency: A Cross-Country Study By Christian Dienes
  10. TSO-TSO-DSO Cooperation: How to align System Operation in Future Power Markets? By Neuhoff, Karsten; Ruester, Sophia; Schwenen, Sebastian
  11. The distributional effects of energy taxes By OECD

  1. By: Neuhoff, Karsten
    Abstract: Long‐term energy contracts have featured prominently in many decisions of the European Commission to support the opening of the electricity markets. Contracts were seen to foreclose the market hence the Commission comprehensively unwound pre‐existing long‐term contracts and formulated strict criteria for new long‐term contracts. As a result, market participants are today reluctant to engage in long‐term (e.g. 20 years) contracts. In recent years mid‐ term contracting (1‐5 years), has played a far stronger role for risk management and investment in the practice of business. This has to date not been reflected in policy discussions. For example, most analysis of capacity mechanisms contrast the energy only spot market (day‐ahead) without mid‐term contracts with a capacity remuneration mechanism that offers several years contract coverage. This motivated the participants of the Future Power Market Platform to discuss the empirical situation with mid‐term contracts, the mechanisms underpinning their price formation, and the implications of mid‐term contracting for investment, re‐investment, and closure of power stations, as well as for congestion management. We find that: ‐ Large discrepancies of mid‐term contracting volumes across countries can reflect a variety of factors including regulatory design and consumer choices. ‐ Historically, investors were willing to undertake investment in liberalized electricity markets based on mid‐term contracting and retail customer basis. With the scale of current uncertainties more security is needed to back new investments. ‐ Mid‐term contracting can play a significant role in supporting re‐investment choices and coordination of mothballing and closure decisions. The discussion raised a set of questions that will be discussed in more detail in future meetings: ‐ What are the specific drivers for generation and different loads to sign mid‐term contracting and what factors are constraining an increasing volume of such contracts? ‐ Can congestion management mechanisms enhance the liquidity of mid‐term energy contracts by issuing transmission contracts of similar maturity so as to integrate different regional markets? ‐ The reference price for contracting is the short‐term price. This raises the question how shortterm energy prices are emerging and whether they reflect the value of system services provided?
    Keywords: Role of Contracting,European Electricity Markets
    JEL: Q41 Q42 Q48 L94 L95
    Date: 2013–05–24
  2. By: Neuhoff, Karsten; Schwenen, Sebastian
    Abstract: Current EU short-term market designs for electricity face several challenges in (i) securing efficient system operation (ii) unlocking the full potential of flexible resources and (iii) fostering effective use of transmission capacity. For a gradual reform of market design and to guarantee secure operation of (cross-border) flexible resources, firm nominations for generation and load are required already at intraday, with subsequent auctions taking network constraints into account. Alternatively, gate closure can be moved several hours ahead of real-time with SO administered balancing markets starting accordingly. In both cases all auctions subsequent to day-ahead trades could be based on complex bids and hosted at a common platform at TSO, ISO or PX, where also transmission capacity and capacity allocation is jointly calculated.
    Keywords: gate closure,electricity market design
    JEL: Q41 Q42 Q48 L94 L95
    Date: 2013–06–28
  3. By: Neuhoff, Karsten; Ruester, Sophia; Schwenen, Sebastian
    Abstract: Gas‐fired power plants constitute a direct and important link between the gas and the electricity sectors and thus between the Target Models for electricity and gas. As the need for a flexible operation of gas-fired power plants will increase in tomorrow’s low‐carbon power markets, so also will the challenges for market design of both sectors in allowing for flexible trading arrangements. For the electricity markets, options to advance intraday and balancing market design are currently discussed, such as complex bids, the frequency of intraday and balancing market clearing, and the joint optimization of energy and reserve markets. For the gas market, concrete options for design advances are yet to be explored. The success – and the flaws – of the implementation of the new EC Network Codes for gas will provide new food for debates. Last, the interaction between gas and electricity TSOs in balancing the heavily interlinked short-term electricity and gas markets poses a need for (more) coordination between the different types of TSOs.
    Keywords: Gas and Electricity Market Design,Gas-fired Power Plants
    JEL: Q41 Q42 Q48 L94 L95
    Date: 2014–04–24
  4. By: Hecking, Harald (Energiewirtschaftliches Institut an der Universitaet zu Koeln)
    Abstract: The paper at hand examines the power system costs when a coal tax or a fixed bonus for renewables is combined with CO2 emissions trading. It explicitly accounts for the interaction between the power and the gas market and identifies three cost effects: First, a tax and a subsidy both cause deviations from the cost-efficient power market equilibrium. Second, these policies also impact the power sector's gas demand function as well as the gas market equilibrium and therefore have a feedback effect on power generation quantities indirectly via the gas price. Thirdly, by altering gas prices, a tax or a subsidy also indirectly affects the total costs of gas purchase by the power sector. However, the direction of the change in the gas price, and therefore the overall effect on power system costs, remains ambiguous. In a numerical analysis of the European power and gas market, I find using a simulation model integrating both markets that a coal tax affects gas prices ambiguously whereas a fixed bonus for renewables decreases gas prices. Furthermore, a coal tax increases power system costs, whereas a fixed bonus can decrease these costs because of the negative effect on the gas price. Lastly, the more market power that gas suppliers have, the stronger the outlined effects will be.
    Keywords: CO2 abatement; oligopoly; gas market; power market
    JEL: C60 L13 Q02 Q48
    Date: 2015–05–05
  5. By: Neuhoff, Karsten; Schwenen, Sebastian
    Abstract: Strategic reserves are in principle well suited to address both generation adequacy and system security in power markets. Depending on the power system and on the network topology, a strategic reserve has to be designed to fulfill both objectives. For the design of a strategic reserve (SR) in the German context, this implies that the strategic reserve should be able to deal with local scarcities in the south arising from network constraints that threat system security, as well as to maintain generation adequacy at the system‐wide level. This distinction will be of particular importance for a German strategic reserve that could either replace or run in parallel to the current ‘Netzreserve’. Policymakers also will have to decide on the degree to which additional policy goals such as strategies for coal‐fired plants may be reflected in the overall power market design and hence also within a strategic reserve. International coordination for the design of any capacity remuneration mechanisms (CRMs) offers the potential of cost‐reductions as the size of coordinated reserve capacities may decrease. If a reserve can deliver value and serve critical load in neighboring countries, coordinated CRMs, especially in central Europe should be further explored. At the same time, the role of interconnectors and the role of international re‐dispatch after SR activation have to be taken into account. While technical factors have to be considered yet, many lessons for implementing a strategic reserve exist, as for example relying on experiences in Belgium, Sweden, Poland and Finland.
    Keywords: German Power Market,Market Design
    JEL: L94 Q48
    Date: 2014–10–17
  6. By: Maya M. Papineau (Department of Economics, Carleton University)
    Abstract: While green-labeled buildings have been found to sell at a premium compared to nearby controls with similar observable characteristics, the voluntary nature of the labeling decision implies green-labeled buildings may have different unmeasured characteristics that may account for at least a portion of the premium. Therefore, it is unclear whether green-labeled building premiums are a causal effect of the labels. I use data on repeat sales transactions and detailed hedonic characteristics to test whether green-labeled office buildings were selling at a premium before they were labeled, and combine these results with post-labeling price premium estimates to identify realized cost-benefit ratios for green-labeling policies. The data suggest the causal net benefits of green labels range from $11.50-$19.95 per square foot. The estimated net benefits are smaller than previous estimates that have focused solely on the benefits and ignored the potential biases from nonrandom selection.
    Keywords: Green Labels; Nonresidential Real Estate; Cost-Benefit Analysis
    JEL: Q48 D61 R33
    Date: 2015–05–06
  7. By: Meya, Johannes
    Abstract: Real life applications of yardstick regulation frequently refer to historical cost data. While yardstick regulation cuts the link between firms own costs and prices firms may charge in a static setting, it does not do so in a dynamic setting where historical cost data is used. A firm can influence the price it will be allowed to charge in the future if its behavior today can affect future behavior of other firms that determines the price this firm will be able to charge later on. This paper shows that, assuming that slack, inflation of costs, is beneficial to firms, a trade-off between short term profit through abstinence from slack in (infinitely) many periods arises. A ratchet effect that yardstick regulation was meant to overcome can occur and firms can realize positive rents because of the use of historical cost data, even if firms are identical. Equilibria with positive slack can exist without any collusion between firms or threat. Moreover, this problem is more severe if the firm with lowest costs of all other firms instead of the average firm is the yardstick.
    Keywords: yardstick regulation,yardstick competition,ratchet effect,historical cost data
    JEL: L51 L98 C73
    Date: 2015
  8. By: Randall, Alan
    Keywords: Public Economics, Risk and Uncertainty,
    Date: 2015–02
  9. By: Christian Dienes (Schumpeter School of Business and Economics, University of Wuppertal, Germany)
    Abstract: This paper empirically studies the relationship between different compliance strategies concerning environmental legislation and intentions of entrepreneurs to increase their firms’ material and energy efficiency in the next two years. Moreover, I examine the relationship between such intentions and the extent to which entrepreneurs are satisfied with past investments in resource efficiency improvements. Using data covering small and medium-sized enterprises from 36 countries from 2013, this study also explores the institutional framework regarding the stringency and enforcement of national environmental regulations. The results based on the total sample indicate that entrepreneurs who are more satisfied with past resource efficiency investments and who follow a strategy which goes beyond compliance are more likely to intend material and energy efficiency improvements in the future. The results further suggest that entrepreneurs translate their pro-environmental attitudes into intentions to reduce their demand for energy but not their demand for materials. Furthermore, the results based on subgroup analyses also point to decreasing marginal productivities of resource efficiency investments.
    Keywords: energy and material efficiency improvements, return on investment, compliance strategy, environmental regulation
    Date: 2015–05
  10. By: Neuhoff, Karsten; Ruester, Sophia; Schwenen, Sebastian
    Abstract: With increasing variability of demand and supply, transmission system operators (TSOs) across Europe adapt their internal processes and operational approaches. These processes comprise different interfaces with other market participants (e.g. via balancing markets, reserve procurement or NTC calculation). However, currently internal TSO approaches and market interfaces differ widely among TSOs in Europe. Different methods of reserve procurement, balancing rules, gate closure and algorithms for market clearing prevail. The Target Model aims at improving this situation and therefore is concerned with the definition and alignment of market protocols for these different interfaces. However, currently the focus lies on information exchange and to some extent a standardization of balancing energy products. Placing the core of TSO operation itself, also for system-services and internal market clearing processes, in the center of the debate, could lead to additional benefits both with respect to cross-border network operation as well as cross-border energy trade.
    Keywords: System Operation,Power Markets
    JEL: Q41 Q42 Q48 L94 L95
    Date: 2014–06–27
  11. By: OECD
    Abstract: New evidence for 21 OECD countries shows that the distributional effects of energy taxes differ by energy carrier. On an expenditure basis, taxes on transport fuels are not regressive on average, as households in lower expenditure deciles spend a lower proportion of their expenditure on taxes on transport fuels. While the unweighted 21-country average of the proportion of income spent on transport fuel taxes is highest for households in the lowest and in the middle deciles, there is heterogeneity across countries. Some countries show progressive effects of taxes on transport fuels both on an expenditure and an income basis, while others show more proportional effects or tend to place the highest burden on middle expenditure deciles. Taxes on heating fuels are slightly regressive, i.e., the percentage of expenditure spent on them decreases with expenditure. Taxes on electricity are more regressive than taxes on heating fuels.<P>Les effets redistributifs des taxes sur l'énergie<BR>De nouvelles données portant sur 21 pays de l’OCDE montrent que les effets redistributifs des taxes sur l’énergie varient selon le produit énergétique considéré. Selon l’approche fondée sur les dépenses, les taxes sur les carburants ne sont pas régressives en moyenne, car les ménages appartenant aux déciles inférieurs de dépenses consacrent une fraction plus faible de leurs dépenses à ces taxes. Alors que la moyenne non pondérée pour 21 pays de la proportion du revenu consacrée aux taxes sur les carburants est la plus élevée pour les ménages appartenant aux déciles inférieur et moyen, il existe une hétérogénéité entre pays. Dans certains pays, les taxes sur les carburants ont des effets progressifs à la fois avec l’approche fondée sur les dépenses et sur les revenus, alors que dans d’autres, les effets sont plus proportionnels ou la charge la plus lourde pèse sur les déciles moyens de dépenses. Les taxes sur les combustibles sont légèrement régressives, c’est-à-dire que le pourcentage de dépenses qui leur est consacré diminue avec les dépenses. Les taxes sur l’électricité sont plus régressives que celles sur les combustibles.
    Keywords: distribution services, Energy taxation
    JEL: H23 Q40 Q52
    Date: 2015–05

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