nep-reg New Economics Papers
on Regulation
Issue of 2016‒03‒29
nine papers chosen by
Natalia Fabra
Universidad Carlos III de Madrid

  1. Which electricity market design to encourage the development of demand response? By Vincent Rious; Yannick Perez; Fabien Roques
  2. Lessons Learned from Three Decades of Experience with Cap-and-Trade By Richard Schmalensee; Robert N. Stavins
  3. Regulation of non-marketed outputs and substitutable inputs By Bertsch, Joachim; Hagspiel, Simeon
  4. Net Neutrality, Pricing Instruments and Incentives By Joshua S. Gans; Michael L. Katz
  5. Analysing the potential economic value of energy storage By Lisa Flatley; Monica Giulietti; Luigi Grossi; Elisa Trujillo-Baute; Michael Waterson
  6. Finding the Right Yardstick: Regulation under Heterogeneous Environments By Endre Björndal; Mette Bjoerndal; Astrid Cullmann; Maria Nieswand
  7. Cross-Border Effects of Capacity Mechanisms: Do Uncoordinated Market Design Changes Contradict the Goals of the European Market Integration? By Roland Meyer; Olga Gore
  8. The Law of one Price in Global Natural Gas Markets - A Threshold Cointegration Analysis By Nick, Sebastian; Tischler, Benjamin
  9. On the Quality and Impact of Residential Energy Performance Certificates By Hårsman, Björn; Daghbashyan, Zara; Chaudhary, Parth

  1. By: Vincent Rious (E3S - Supélec Sciences des Systèmes [Gif-sur-Yvette] - SUPELEC); Yannick Perez (LGI - Laboratoire Génie Industriel - EA 2606 - CentraleSupélec, RITM - Réseaux Innovation Territoires et Mondialisation - UP11 - Université Paris-Sud - Paris 11); Fabien Roques (LESIA - Laboratoire d'études spatiales et d'instrumentation en astrophysique - UPMC - Université Pierre et Marie Curie - Paris 6 - UP7 - Université Paris Diderot - Paris 7 - Observatoire de Paris - INSU - CNRS - Centre National de la Recherche Scientifique)
    Abstract: Demand response is a cornerstone problem in electricity markets under climate change constraints. Most liberalized electricity markets have a poor track record at encouraging the deployment of smart meters and the development of demand response. In Europe, different models are considered for demand response, from a development under a regulated regime to a development under competitive perspectives. In this paper focusing on demand response and smart metering for mid-­‐size and small consumers, we investigate which types of market signals should be sent to demand managers to see demand response emerge as a competitive activity. Using data from the French power system over nine years , we compare the possible market design options which would enable the development of demand response. Our simulations demonstrate that under the current market rules demand response is not a profitable activity in the French electricity industry. Introducing a capacity market could bring additional revenues to demand response providers and improve incentives to put in place demand response programs in a market environment.
    Keywords: Market Design,Demand Response,Capacity Market
    Date: 2015
  2. By: Richard Schmalensee (Massachusetts Institute of Technology); Robert N. Stavins (, Harvard Kennedy School, Resources for the Future and National Bureau of Economic Research)
    Abstract: This essay provides an overview of the major emissions trading programs of the past thirty years on which significant documentation exists, and draws a number of important lessons for future applications of this environmental policy instrument. References to a larger number of other emissions trading programs that have been implemented or proposed are included.
    Keywords: Market-based instruments, Cap-and-trade, Leaded Gasoline Phasedown, Clean Air Act Amendments of 1990, Sulfur Dioxide, Acid Rain, Carbon Dioxide, Global Climate Change, European Union Emissions Trading System
    JEL: Q54 Q58 Q40 Q48
    Date: 2015–10
  3. By: Bertsch, Joachim (Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI)); Hagspiel, Simeon (Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI))
    Abstract: We study the regulation of a monopolistic firm that provides a non-marketed output based on multiple substitutable inputs. The regulator is able to observe the effectiveness of the provision, but faces information asymmetries with respect to the efficiency of the firm’s activities. Motivated by the example of electricity transmission services, we consider a setting where one input (grid expansion) and the output (uninterrupted electricity transmission) are observable, while another input(sophisticated grid operation) and related costs are not. Multi-dimensional information asymmetries are introduced by discrete distributions for the functional form of the marginal rate of substitution between the inputs as well as for the input costs. For this novel setting, we investigate the theoretically optimal Bayesian regulation mechanism. We find that the first best solution cannot be obtained in case of shadow costs of public funding. The second best solution implies separation of the most efficient type with first best input levels, and upwards distorted (potentially bunched)observable input levels for all other types. Moreover, we compare these results to a simpler on-Bayesian approach and hence, bridge the gap between the academic discussion and regulatory practice. We provide evidence that under certain conditions, a single contract on-Bayesian regulation can indeed get close to the second best of the Bayesian menu of contracts regulation.
    Keywords: regulation; asymmetric information; mechanism design; non-marketed goods; substitutable inputs; electricity transmission;
    JEL: D42 D82 L51
    Date: 2015–12–16
  4. By: Joshua S. Gans; Michael L. Katz
    Abstract: We correct and extend the results of Gans (2015) regarding the effects of net neutrality regulation on equilibrium outcomes in settings where a content provider sells its services to consumers for a fee. We examine both pricing and investment effects. We extend the earlier paper’s result that weak forms of net neutrality are ineffective and also show that even a strong form of net neutrality may be ineffective. In addition, we demonstrate that, when strong net neutrality does affect the equilibrium outcome, it may harm efficiency by distorting both ISP and content provider investment and service-quality choices.
    JEL: D4 D42 D43 L1 L12 L13
    Date: 2016–02
  5. By: Lisa Flatley (University of Warwick); Monica Giulietti (Loughborough University); Luigi Grossi (University of Verona); Elisa Trujillo-Baute (University of Warwick and Chair of Energy Sustainability, Barcelona Institute of Economics); Michael Waterson (University of Warwick)
    Abstract: This paper examines the likely market for electrical energy storage from a market viewpoint, taking market prices as given and determining the extent to which a strategy of arbitrage across the day, buying at the lowest price times at night and selling at the highest times during the early evening, generates profits in the British context. The paper sets out the potential problems as the market moves to absorb increasing amounts of wind, then characterises the nature of prices, which reveals the importance of a strategy in which power is absorbed into store for a relatively few hours of the day and discharged over a relatively few hours. The paper models the ongoing costs of operation and compares them with revenues, but does not consider construction costs. It argues that additional incentives may need to be put into place in order to render storage over relatively longer periods more attractive.
    Keywords: Energy storage, arbitrage, electricity markets, market clearing
    JEL: L94 L98 H54 D24 Q41 Q47
    Date: 2016
  6. By: Endre Björndal; Mette Bjoerndal; Astrid Cullmann; Maria Nieswand
    Abstract: Revenue cap regulation is often combined with systematic benchmarking to reveal the managerial inefficiencies when regulating natural monopolies. One example is the European energy sector, where benchmarking methods are based on actual cost data, which are influenced by managerial inefficiency as well as operational heterogeneity. This paper demonstrates how a conditional nonparametric method, which allows the comparison of firms operating under heterogeneous technologies, can be used to estimate managerial inefficiency. A dataset of 123 distribution firms in Norway is used to show aggregate and firm-specific effects of conditioning. By comparing the unconditional model to our proposed conditional model and the model presently used by the Norwegian regulator, we see that the use of conditional benchmarking methods in revenue cap regulation may effectively distinguish between managerial inefficiency and operational heterogeneity. This distinction leads first to a decrease in aggregate efficient costs and second to a reallocation effect that affects the relative profitability of firms and relative customer prices, thus providing a fairer basis for setting revenue caps.
    Keywords: Data Envelopment Analysis, Yardstick Regulation, Electricity Distribution
    JEL: L94 C44 L51
    Date: 2016
  7. By: Roland Meyer; Olga Gore
    Abstract: This paper analyses cross-border effects of a strategic reserve (SR) and reliability options (ROs) based on a two-country simulation model. Using a game-theoretic approach, the countries' policy options for capacity remuneration mechanisms (CRMs) are analysed with respect to welfare and distribution effects. An SR tends to narrow down the market, while ROs intensify price competition. However, cross-border effects are most likely negative for consumers and producers in total in the case of a unilateral implementation of a CRM, and market design changes should be coordinated. All results are strongly driven by possible changes in competition and market power. In practice, the market design decision should also consider possible regulatory failures that might lead to further market distortions. The risk of market design flaws seems larger for full capacity markets such as ROs than for an SR, which requires only minor adjustments to the market design.
    Keywords: market design, generation adequacy, capacity mechanisms, internal European market
    JEL: L11 L52 L94
    Date: 2014–06
  8. By: Nick, Sebastian (Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI)); Tischler, Benjamin (Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI))
    Abstract: The US and UK markets for natural gas are connected by arbitrage activity in the form of shifting trade volumes of liquefied natural gas (LNG). We empirically investigate the degree of integration between the US and the UK gas markets by using a threshold cointegration approach that is in accordance with the law of one price and explicitly accounts for transaction costs. Our empirical results reveal a high degree of market integration for the period 2000-2008. Although US and UK gas prices seemed to have decoupled between 2009 and 2012, we still find a certain degree of integration pointing towards significant regional price arbitrage. However, high threshold estimates in the latter period indicate impediments to arbitrage that are by far surpassing the LNG transport costs difference between the US and UK gas market.
    Keywords: natural gas market; liquified natural gas; law of one price; arbitrage; nonlinear models; threshold error correction;
    JEL: C51 G14 Q40 Q41
    Date: 2014–11–14
  9. By: Hårsman, Björn (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology); Daghbashyan, Zara (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology); Chaudhary, Parth (Department of Energy Science and Engineering, Indian Institute of Technology, Mumbai, India)
    Abstract: This paper addresses quality and impact issues concerning Energy Performance Certificates (EPC) by means of a dataset based upon the Swedish EPCs for single-family houses. Assuming that the quality of the certificates plays an important role for their impact, we examine to what extent various characteristics of the firms and experts issuing the certificates are influencing their assessments of energy consumption and energy conservation. Exploiting the information on biased assessments, we also investigate the relationship between the transaction price of a house and its EPC label. Doing so, we distinguish the attributes that can be observed by visiting the house and those that a buyer only can inform herself about through the EPC. Applying regression analyses we find that firm and expert characteristics matter quite a lot implying that the EPC-quality could be improved considerably by increasing the inter-rater reliability. The results also show that the price impact of the energy label is related to information that the buyers can obtain by visiting the house rather than to information uniquely provided by the EPCs. Hence, the EPCs per se are unlikely to stimulate energy conservation through the price mechanism.
    Keywords: Residential energy performance certificates; assessments of energy consumption and conservation; inter-rater reliability; capitalization of energy efficiency; hedonic regression
    JEL: D12 Q41 R31
    Date: 2016–03–10

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