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What future(s) for liberalized electricity markets: efficient, equitable or innovative?

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Abstract:
Well-designed electricity liberalization has delivered effciency gains, but political risks of decarbonizing the sector have undermined investment incentives in en-ergy-only markets, while poorly designed regulated tariffs have increased the cost of accommodating renewables. The paper sets out principles from theory and public economics to guide market design, capacity remuneration, renewables support and regulatory tariff setting, with an illustration from a high capital cost low variable cost electricity system. Such characteristics are likely to become more prevalent with increasing renewables penetration, where poor regulation is already threatening current utility business models. The appendix develops and applies a method for determining the subsidy justifed by learning spillovers from solar PV.

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Energy Specializations: Electricity – Markets and Prices ; Renewables – Policy and Regulation; Electricity – Policy and Regulation

JEL Codes:
D42 - Market Structure, Pricing, and Design: Monopoly
Q52 - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General

Keywords: Electricity market design, Tariffs, Renewables support, Utilities

DOI: 10.5547/01956574.39.1.dnew

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Published in Volume 39, Number 1 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.