nep-reg New Economics Papers
on Regulation
Issue of 2019‒04‒01
twenty-one papers chosen by
Natalia Fabra
Universidad Carlos III de Madrid

  1. Buffering Volatility: Storage Investments and Technology-Specific Renewable Energy Support By Jan Abrell; Sebastian Rausch; Clemens Streitberger
  2. Effectiveness of renewable energy subsidies in a CO2 intensive electricity system By Aimilia Pattakou; Aryestis Vlahakis
  3. The Economics of Renewable Energy Support By Jan Abrell; Clemens Streitberger; Sebastian Rausch
  4. The impact of renewable energy forecasts on intraday electricity prices By Sergei Kulakov; Florian Ziel
  5. Phase-out of 'coal to power' in an ETS By Thomas Eichner; Rüdiger Pethig
  6. The European framework for regulating telecommunications: a 25-year appraisal By Cave, Martin; Genakos, Christos; Valletti, Tommaso
  7. Are Consumers Attentive to Local Energy Costs? Evidence from the Appliance Market By Sebastien Houde; Erica Myers
  8. Long-Term Electricity Investments Accounting for Demand and Supply Side Flexibility By Marañón-Ledesma, Hector; Tomasgard, Asgeir
  9. Flexible Electricity Use for Heating in Markets with Renewable Energy By Wolf-Peter Schill; Alexander Zerrahn
  10. The Incidence of Coarse Certification: Evidence from the ENERGY STAR Program By Sebastien Houde
  11. Heterogeneous (Mis-) Perceptions of Energy Costs: Implications for Measurement and Policy Design By Sebastien Houde; Erica Myers
  12. Costs of energy efficiency mandates can reverse the sign of rebound By Don Fullerton; Chi L. Ta
  13. Bunching with the Stars: How Firms Respond to Environmental Certification By Sebastien Houde
  14. Screening instruments for monitoring market power: The return on withholding capacity index (RWC) By Bataille, Marc; Bodnar, Olivia; Steinmetz, Alexander; Thorwarth, Susanne
  15. Permit Markets, Carbon Prices and the Creation of Innovation Clusters By Hans Gersbach; Marie-Catherine Riekhof
  16. The electrification of energy: long-term trends and opportunities By Tsao, Jeffrey Y.; Schubert, E. Fred; Fouquet, Roger; Lave, Matthew
  17. The Impact of Policy Awareness: Evidence from Vehicle Choices Response to Fiscal Incentives By Davide Cerruti; Claudio Daminato; Massimo Filippini
  18. Challenges for EU Merger Control By Massimo Motta; Martin Peitz
  19. Behavioral anomalies and energy-related individual choices: the role of status-quo bias By Julia Blasch; Claudio Daminato
  20. Does Higher Energy Efficiency Lower Economy-Wide Energy Use? By Sebastian Rausch; Hagen Schwerin
  21. Energy-related financial literacy and bounded rationality in appliance replacement attitudes: Evidence from Nepal By Massimo Filippini; Nilkanth Kumar; Suchita Srinivasan

  1. By: Jan Abrell (ETH Zurich, Switzerland); Sebastian Rausch (ETH Zurich, Switzerland); Clemens Streitberger (ETH Zurich, Switzerland)
    Abstract: Mitigating climate change will require integrating large amounts of highly intermittent renewable energy (RE) sources in future electricity markets. Considerable uncertainties exist about the cost and availability of future large-scale storage to alleviate the potential mismatch between demand and supply. This paper examines the suitability of regulatory (public policy) mechanisms for coping with the volatility induced by intermittent RE sources, using a numerical equilibrium model of a future wholesale electricity market. We find that the optimal RE subsidies are technology-specific reflecting the heterogeneous value for system integration. Differentiated RE subsidies reduce the curtailment of excess production, thereby preventing costly investments in energy storage. Using a simple cost-benefit framework, we show that a “smart” design of RE support policies significantly reduces the level of optimal storage. We further find that the marginal benefits of storage rapidly decrease for short-term (intra-day) storage and are small for long-term (seasonal) storage independent of the storage level. This suggests that storage is not likely to be the limiting factor for decarbonizing the electricity sector.
    Keywords: Renewable Energy, Electricity, Volatility, Intermittency, Storage, Technology-specific Regulation, Subsidies, Energy Policy, Climate Policy
    JEL: C63 Q42 Q48 Q54
    Date: 2019–01
  2. By: Aimilia Pattakou (ETH Zurich, Switzerland); Aryestis Vlahakis (ETH Zurich, Switzerland)
    Abstract: Can subsidies to renewable energy effectively internalise CO2 costs in electricity production? Under current policy design it only matters that the replaced energy is dirty, but not how dirty it is. We use a modified peak-load pricing model, including variable renewable generators and the external costs of carbon, to examine the way in which a unit subsidy to variable renewables cannot restore first best optimum. In our model, electricity is generated using a combination of three technology types: two dispatchable, thermal, and CO2 emitting technologies, differing in their emission intensity, and a non-dispatchable renewable technology. We show that available wind capacity is never idle, and derive equations determining optimal installed capacities for all technologies. We then describe the mechanism by which a subsidy that does not discriminate between dirty energies fails to restore first best. Our analysis highlights the importance of a carbon price: even one below the social cost of carbon could have a corrective effect on the merit order of fossil fuels and improve the effectiveness of a subsidy.
    Keywords: Energy policy, Renewable energy, Environmental subsidy
    JEL: Q42 Q48 H23
    Date: 2018–08
  3. By: Jan Abrell (ETH Zurich, Switzerland); Clemens Streitberger (ETH Zurich, Switzerland); Sebastian Rausch (ETH Zurich, Switzerland)
    Abstract: This paper uses theoretical and numerical economic equilibrium models to examine optimal renewable energy (RE) support policies for wind and solar resources in the presence of a carbon externality associated with the use of fossil fuels. We emphasize three main issues for policy design: the heterogeneity of intermittent natural resources, budget-neutral financing rules, and incentives for carbon mitigation. We find that differentiated subsidies for wind and solar, while being optimal, only yield negligible efficiency gains. Policies with smart financing of RE subsidies which either relax budget neutrality or use “polluter-pays-the-price” financing in the context of budget-neutral schemes can, however, approximate socially optimal outcomes. Our analysis suggests that optimally designed RE support policies do not necessarily have to be viewed as a costly second-best option when carbon pricing is unavailable.
    Keywords: Renewable Energy, Wind, Solar, Environmental Regulation, Climate Policy, Decarbonization, Renewable Subsidies, Carbon Pricing, Heterogeneity of Natural Resources, Feed-in tariffs, Green quota
    JEL: Q28 Q42 Q52 Q58 C61
    Date: 2018–03
  4. By: Sergei Kulakov; Florian Ziel
    Abstract: The shift to renewable power is accelerating at a growing pace. Contemporary energy markets undergo profound structural changes. Forecasts as to the wind and solar supply become critically important. This paper studies the impact of these forecasts on electricity market prices. We develop an intraday price model based on day-ahead auction data and errors in wind and solar power prognostications. The model manipulates empirical supply and demand curves recorded in the German EPEX SPOT SE to produce the prices. The obtained results show that forecast errors exert a non-linear impact on intraday prices. Moreover, additional wind and solar power capacities induce non-linear changes in intraday price volatility. Economical and policy implications of these findings are elaborated upon.
    Date: 2019–03
  5. By: Thomas Eichner; Rüdiger Pethig
    Abstract: We investigate the displacement effects of phase-out-of-coal policies in a stylized model of electricity generation and CO2 regulation, in which a group of countries operates an emissions trading scheme (ETS). Electricity markets are either international or national and the emissions cap remains either unchanged or is tightened. With constant emissions cap and trade in electricity, some emissions as well as some coal-based electricity ‘leak’ into other countries and the aggregate welfare of the group of countries declines, if a country unilaterally phases out coal. With constant emissions cap and no trade in electricity, the unilaterally phasing-out country is worse off and the other countries are better off. Following a suggestion in a recently revised EU ETS Directive, we then combine a country’s phase-out policy with canceling the permits it formerly used to generate electricity from coal. When electricity is traded, that combined policy prevents the leakage of emissions and coal-based electricity and shifts a share of the welfare costs to other countries. Without trade in electricity, the other countries generate less coal-based electricity and all countries’ consumption welfare decreases, but all countries benefit from reduced climate damage. Finally, we offer an empirical calibration of our model to the European Union.
    Keywords: phase-out, gas, electricity, leakage, ETS
    JEL: H22 Q37 Q48
    Date: 2019
  6. By: Cave, Martin; Genakos, Christos; Valletti, Tommaso
    Abstract: The European telecommunications sector has been radically transformed in the past 25 years: from a group of state monopolies to a set of increasingly competitive markets. In this paper we summarize how this process has unfolded—for both fixed and mobile telecommunications—by focusing on the evolution of the regulatory framework and by drawing some parallels with the evolution of the sector in the US. Given the major strategic importance of the sector, we highlight some of the challenges that lie ahead.
    Keywords: European Union; Fixed and mobile telecommunication networks; Institutional design; Telecommunications regulation
    JEL: L43 L50 L96 O52
    Date: 2019–02–26
  7. By: Sebastien Houde (ETH Zurich, Switzerland); Erica Myers (University of Illinois, United States of America)
    Abstract: We estimate whether consumers respond to local energy costs when purchasing appliances. Using a dataset from an appliance retailer, we compare demand responsiveness to a measure of energy costs that varies with local energy prices versus purchase prices. We strongly reject that consumers are unresponsive to local energy costs under a wide range of assumptions. These findings run counter to the popular wisdom, which motivates energy standards, that energy costs are a shrouded attribute. Capital investments are an important channel for electricity demand response and may explain some of the large differences between short and long run electricity price elasticities.
    Keywords: inattention, shrouded attributes, energy efficiency gap, misperceptions, appliance efficiency standards
    JEL: Q41 Q50 L15 D12 D83
    Date: 2019–02
  8. By: Marañón-Ledesma, Hector; Tomasgard, Asgeir
    Abstract: Short-term Electricity Demand Response (DR) is an emerging technology in Europe's Electricity markets that will introduce a new degree of exibility. The objective of this work is to analyze to what extent the untapped DR potential can facilitate an optimal transition to an European low emission power system. The beneffits of DR consists of a reduction in peak load consumption, which leads to reduction in capacity investments, production and consumption savings, reduced congestion phases, reliable integration of intermittent renewable resources and supply and demand exibility. The capabilities of DR are studied in the European Model for Power Investment with (High Shares of) Renewable Energy (EMPIRE), which is an electricity sector model with a time span of 30 years ending in 2050. The model is two-stage stochastic that includes uncertainty at the operational level and energy economics dynamics at a strategic level. The main contribution of this article is designing the investment-operation DR module within the EMPIRE framework. It models several classes of shiftable and curtailable loads in residential, commercial and industrial sectors, including exibility periods, operational costs and endogenous DR investments, for 31 European countries. The results show that DR capacity substitutes partially exible supply side capacity from peak gas plants and battery storage, in addition to enabling more solar PV production.
    Keywords: Demand Response; Flexibility; Linear Stochastic Optimization; Demand Side Management; European Power System; Energy Economics
    JEL: C61 L90 L97
    Date: 2019–03–26
  9. By: Wolf-Peter Schill; Alexander Zerrahn
    Abstract: Using electricity for heating can contribute to decarbonization and provide flexibility to integrate variable renewable energy. We analyze the case of electric storage heaters in German 2030 scenarios with an open-source electricity sector model. Making customary night-time storage heaters temporally more flexible offers only moderate benefits because renewable availability during daytime is limited in the heating season. As storage heaters feature only short-term heat storage, they also cannot reconcile the seasonal mismatch of heat demand in winter and high renewable availability in summer. Generally, flexible electric heaters increase the use of generation technologies with low variable costs, which are not necessarily renewables.
    Keywords: Power-to-heat, renewable energy, electricity sector, power system model, flexibility, storage
    JEL: C61 Q41 Q42
    Date: 2018
  10. By: Sebastien Houde (ETH Zurich, Switzerland)
    Abstract: A coarse certification provides simple, but incomplete information about quality. Its main rationale is to help consumers trade off dimensions of quality that are complex and lack salience. In imperfectly competitive markets, it may induce excess bunching at the certification requirement, crowd out high quality, and facilitate price discrimination. Who will ultimately benefit from a coarse certification thus depends on the degree of market power firms can exercise as well as on consumers’ sophistication in responding to such information. This paper illustrates these insights using the ENERGY STAR certification program as a case study. I investigate the incidence of the program with a structural econometric model of the U.S. appliance market. I find that the certification can crowd out energy efficiency, make consumers worst off, and have small, but heterogenous impacts on firms’ profits. In this context, the certification tends to not be welfare-improving. This conclusion, however, crucially depends on the market environment and the design of the policy - in scenarios where energy prices are low, or the certification requirement is very stringent, the ES program can be welfare-improving.
    Keywords: Coarse certification, consumer attention, differentiated markets, structural estimation, energy efficiency
    JEL: D43 L13 L15 L68 Q48
    Date: 2018–05
  11. By: Sebastien Houde (ETH Zurich, Switzerland); Erica Myers (University of Illinois, United States of America)
    Abstract: Quantifying heterogeneity in consumers’ misperceptions of product costs is crucial for policy design. We illustrate this point in the energy context and the design of Pigouvian policies. We estimate non-parametric distributions of perceptions of energy costs in the U.S. appliance market using a revealed preference approach. We show that the average degree of misperception is misleading— while the largest share of consumers correctly perceives energy costs, a significant share undervalues them, and smaller shares either significantly overvalues or completely ignores them. We show that setting a tax based on mean misperception deviates substantially from the optimal tax that accounts for heterogeneous misperceptions. While correctly characterizing misperception is crucial for setting optimal Pigouvian taxes for externalities, it is less important for setting optimal standards. We find that standards can largely outperform taxes. Standards’ advantage is they reduce variance in energy operating costs relative to taxes, which internalizes distortionary effects from misperceptions.
    Keywords: demand estimation, misperceptions, energy efficiency gap, behavioral welfare economics
    JEL: Q41 Q50 L15 D12 D83
    Date: 2019–02
  12. By: Don Fullerton; Chi L. Ta
    Abstract: Improvements in energy efficiency can reduce costs of consuming services from cars and appliances and result in positive rebound that offsets part of the direct energy reduction. Our analytical general equilibrium model decomposes rebound into direct and indirect effects. A costless technology shock has positive rebound as in prior literature, but a pre-existing energy efficiency standard can negate direct energy savings from that shock. For increased stringency of energy efficiency standards, however, we show how income effects reduce energy use for both services and other goods. We show exactly when those increased costs imply negative total rebound.
    JEL: Q48
    Date: 2019
  13. By: Sebastien Houde (ETH Zurich, Switzerland)
    Abstract: This paper shows that firms respond strategically to ENERGY STAR, a voluntary certification program for energy-efficient products. Firms offer products that bunch at the certification requirement, differentiate certified products in energy and non-energy dimensions, and charge a price premium on certified products. In the US refrigerator market, the magnitude of the price premium corresponds exactly to the average willingness to pay consumers have for certified products. This suggests that firms have the ability to extract most of the consumer surplus associated with certified products. If firms had to pay a fee to use the certification, a policy recently suggested, most of the cost should then be borne by consumers. I illustrate how such policy would impact the adoption of energy-efficient appliances.
    Keywords: environmental certification, firm behavior, energy efficiency, imperfect competition
    JEL: L13 L15 Q48 Q58
    Date: 2018–07
  14. By: Bataille, Marc; Bodnar, Olivia; Steinmetz, Alexander; Thorwarth, Susanne
    Abstract: While markets have been liberalized all over the world, incumbents often still hold a dominant position, e.g. on energy markets. Thus, wholesale electricity markets are subject to market surveillance. Nevertheless, consolidated findings on abusive practices of market power and their cause and effect in these markets are scarce and non-controversial market monitoring practices fail to exist. Right now, the Residual Supply Index (RSI) is the most important instrument for market monitoring. However, a major drawback of this index is its focus on just one specific aspect of market power in wholesale electricity markets whereas different consequences of market power are possible. Hence, markets could be distorted in several ways and we propose the 'Return on Withholding Capacity Index' (RWC) as a complementary index to the RSI. The index is a measure of the firms' incentive to withhold capacity. The benefits and practicability of the RWC is shown by an application on data for the German-Austrian electricity wholesale market in 2016.
    Keywords: Market Power,Electric Power Markets,Residual Supply Index
    JEL: L11 L43 L94 K23 C13
    Date: 2019
  15. By: Hans Gersbach (ETH Zurich, Switzerland); Marie-Catherine Riekhof (ETH Zurich, Switzerland)
    Abstract: Innovation clusters combining public and private effort to develop breakthrough technologies promise greater technological advances to slow down climate change. We use a multi-country model with emissions permit trade to examine how international climate policy can incentivize countries to create such clusters. We find that a minimal carbon price is needed to attract applied research firms, but countries may nevertheless fail to invest in complementary research infrastructure. We construct a mechanism that leads to innovation clusters. It is a combination of low permit endowments for the country with the lowest costs to build the needed infrastructure, compensation for this country by profits from permit trade, and maximal possible permit endowments for the remaining countries.
    Keywords: International permit markets, Carbon prices, Innovation clusters, Research infrastructure, Applied R&D, Climate change mitigation, Externalities
    JEL: H23 Q54 O32
    Date: 2018–11
  16. By: Tsao, Jeffrey Y.; Schubert, E. Fred; Fouquet, Roger; Lave, Matthew
    Abstract: We present and analyze three powerful long-term historical trends in the electrification of energy by free-fuel sources. These trends point toward a future in which energy is affordable, abundant, and efficiently deployed; with major economic, geo-political, and environmental benefits to humanity.We present and analyze three powerful long-term historical trends in energy, particularly electrical energy, as well as the opportunities and challenges associated with these trends. The first trend is from a world containing a diversity of energy currencies to one whose predominant currency is electricity, driven by electricity’s transportability, exchangeability, and steadily decreasing cost. The second trend is from electricity generated from a diversity of sources to electricity generated predominantly by free-fuel sources, driven by their steadily decreasing cost and long-term abundance. These trends necessitate a just-emerging third trend: from a grid in which electricity is transported unidirectionally, traded at near-static prices, and consumed under direct human control; to a grid in which electricity is transported bidirectionally, traded at dynamic prices, and consumed under human-tailored artificial agential control. These trends point toward a future in which energy is not costly, scarce, or inefficiently deployed but instead is affordable, abundant, and efficiently deployed; with major economic, geo-political, and environmental benefits to humanity.
    Keywords: energy generation; energy storage; environment; fossil fuel; government policy and funding
    JEL: R14 J01
    Date: 2018–06–05
  17. By: Davide Cerruti (ETH Zurich, Switzerland); Claudio Daminato (ETH Zurich, Switzerland); Massimo Filippini (ETH Zurich, Switzerland)
    Abstract: Isolating the role of limited knowledge, psychological frictions and policy characteristics is key when evaluating a public program and designing future policies. This paper explores the role of awareness about the presence of fiscal programs in determining their impact on individual choices. Our identification strategy exploits quasi-experimental variation in the introduction of fiscal incentives aimed at promoting the purchase of energy efficient vehicles, and a direct measure of policy awareness at the individual level. We find an important impact of awareness on consumers’ vehicle choices, highlighting that limited awareness may represent a critical barrier to the effectiveness of public programs.
    Keywords: Policy awareness, Fiscal programs, Environmental taxation, Vehicle choices
    JEL: D12 D83 H23 H31 Q48
    Date: 2019–03
  18. By: Massimo Motta; Martin Peitz
    Abstract: The proposal to relax EU merger control to allow for anti-competitive 􀇲European Champions􀇳 may lead policy makers to update current merger control. While we see little merit in this specific proposal, we recommend a revision that goes into a different direction and, in particular, addresses mergers of potential competitors and the burden of proof. Thus, our proposal aims at the EC addressing problems of under-enforcement and making better-informed decisions. However, we would find it sensible to introduce in the Merger Regulation a clause whereby in exceptional and well-defined cases a merger, which would otherwise pass muster on competition grounds, may be prohibited due to defence, strategic and security of supply considerations.
    Keywords: Merger policy, European Union, potential competitor, safe harbour, national champion
    JEL: K21 L41 L52
    Date: 2019–03
  19. By: Julia Blasch (Institute for Environmental Studies (IVM), VU University Amsterdam); Claudio Daminato (ETH Zurich, Switzerland)
    Abstract: The literature on the energy-efficiency gap discusses the status-quo bias as a behavioral anomaly that potentially increases the energy consumption of a household through at least three channels: (1) by making consumers keep their energy-using durables as long as possible, until wearout forces them to replace their equipment (2) by making consumers choose new energy-using durables that resemble the existent ones that need replacement, and (3) by making consumers overuse appliances in an attempt to mentally amortize the initial investment cost. The results presented in this study are an attempt to empirically investigate the extent to which the presence of a bias towards the status quo is linked to residential electricity consumption through two out of the above mentioned three channels: non-replacement of old appliances and overuse of appliances. Using data from a large household survey conducted in three European countries, we find that our measure of status-quo bias is a significant predictor of both the age of home appliances as well as the level of consumption of energy services of a household. The tendency of status-quo biased individuals to keep their appliances longer and to use them more intensely is also reflected in the total electricity consumption of their households, which is found to be around 5.7% higher than for households of non-biased individuals. This research thus provides some first empirical evidence that the status-quo bias has the potential to create a substantial barrier to increasing residential energy efficiency. Our findings prompt policy makers to design instruments that take this barrier into account.
    Keywords: status-quo bias; loss aversion; appliances replacement; residential energy consumption; energy-related financial literacy
    JEL: D12 D91 Q41 Q50
    Date: 2018–10
  20. By: Sebastian Rausch (ETH Zurich, Switzerland); Hagen Schwerin (ETH Zurich, Switzerland)
    Abstract: We develop a general equilibrium growth model with capital and energy use to examine the hypothesis that economy-wide energy use increases with energy efficiency. To obtain energy use that would have occurred in the absence of energy efficiency changes, chosen energy efficiency is induced by technological change. Viewing technological change in form of changes in the cost of capital and energy producing energy services enables us to control for the sources of energy efficiency improvements in a counterfactual setting. Calibrating the model to the post-WWII U.S. economy, we find that higher energy efficiency increased rather than reduced energy use, because lower capital cost enhanced energy use by more than the increase in energy cost reduced it. This casts strong doubts on the view that energy-saving technological change has lowered fossil energy use.
    Keywords: energy use, energy efficiency, energy rebound, efficiency paradox, Jevons paradox, energy-saving technological change, investment-specific technological change, general equilibrium, putty clay
    JEL: D13 E23 O30 O41 Q43
    Date: 2018–10
  21. By: Massimo Filippini (ETH Zurich, Switzerland); Nilkanth Kumar (ETH Zurich, Switzerland); Suchita Srinivasan (ETH Zurich, Switzerland)
    Abstract: Bounded rationality is an example of an important behavioral failure responsible for the energy-efficiency gap, whereby agents under-invest in energy-efficient technologies. One means of addressing this is by improving the energy-related financial literacy of households, which is defined as the combination of energy knowledge and cognitive abilities that are needed in order for agents to take sound decisions with respect to investment in durables. This has been found to improve the ability of agents to calculate the lifetime costs of technologies. The objective of this paper is to evaluate the determinants of energy-related financial literacy of respondents from about 2000 urban households in the Terai region of Nepal, and to analyze whether this ability has an effect on replacement attitudes of households regarding inefficient technologies. Using a novel household survey data, we find that respondents have low levels of energy-related financial literacy. While we find differences in the role of some socio-economic determinants of energy-related financial literacy compared to previous studies from developed countries, we also find certain common results, such as female respondents having lower scores. Additionally, we find that higher levels of energy-related financial literacy, especially stronger computational abilities, lead to more rational attitudes with regards to replacement of old appliances. As development has brought, and continues to bring, more households in low and middle-income countries (LMICs) closer to technologies of their liking, ensuring the adoption of energy-efficient technologies may be critical for ensuring sustainable development in the decades to come, and higher energy-related financial literacy may be one means of achieving that.
    Keywords: Bounded rationality, Energy literacy, Financial literacy, Households, Nepal
    JEL: D12 D80 Q41 Q48
    Date: 2019–03

This nep-reg issue is ©2019 by Natalia Fabra. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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