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The Energy Journal
Volume 38, KAPSARC Special Issue



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Oil Subsidies and Renewable Energy in Saudi Arabia: A General Equilibrium Approach

Jorge Blazquez, Lester C Hunt, and Baltasar Manzano

DOI: 10.5547/01956574.38.SI1.jbla
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Abstract:
In 2016, the Kingdom of Saudi Arabia (KSA) announced its Vision 2030 strategic plan incorporating major changes to the economic structure of the country, including an intention to deploy 9.5 GW of renewable energy in an effort to reduce the penetration of oil in the electricity generation system. This paper assesses the macroeconomic impact of such changes in the KSA, coupled with reductions in implicit energy subsidies. Based on a dynamic general equilibrium model, our analysis suggests that if the KSA government were to deploy a relatively small quantity of renewable technology, consistent with the country's Vision 2030 plans, there would be a positive impact on the KSA's long run GDP and on households' welfare. However, we demonstrate that if the integration costs of renewable technology were high, then households' welfare would be maximized at around 30-40% renewables penetration. In addition, we show that a policy favoring renewable energy would increase the dependence of the KSA on oil, given that a larger share of GDP would be linked to oil exports and so, potentially, to oil price shocks. Finally, it is shown that exporting significantly more oil onto the international market could have a negative impact on the international oil price and thus could offset the potential gains from the renewable energy policy.




Inventory and Distribution of Energy Subsidies of China

Zhan-Ming Chen

DOI: 10.5547/01956574.38.SI1.zche
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Abstract:
To provide support for the energy subsidy reform as a critical step of China's recent energy reform agenda, a comprehensive energy subsidy inventory of China is compiled and the associated distributional effect is investigated in this study. According to the results, the lower boundary estimation of annual energy subsidies of China was 90-202 billion CNY, equivalent to 0.22%-0.37% of GDP or 0.95%-1.21% of government expenditure, during 2010-2014. Thanks to the specific subsidies provided to rural grid construction and transportation, 72% of the energy subsidies were distributed to residents in 2012, while fixed capital and export carried another 13% and 10%. Poorer urban household received higher energy subsidy ratio through dwelling and food expenditures, but lower ratio through transportation and communication expenditures. The overall energy subsidies are slightly regressive, thus adequate reform can narrow wealth gap on the one hand and reduce budgetary pressure on the other.




How do Price Caps in China’s Electricity Sector Impact the Economics of Coal, Power and Wind? Potential Gains from Reforms

Bertrand Rioux, Philipp Galkin, Frederic Murphy, and Axel Pierru

DOI: 10.5547/01956574.38.SI1.brio
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Abstract:
China imposes maximum prices by plant type and region on the electricity that generators sell to utilities. We show that these price caps create a need for subsidies and cross-subsidies, and affect the economics of wind power. We model the price caps using a mixed complementarity formulation, calibrated to 2012 data. We find that the caps impose an annual cost of 45 billion RMB, alter the generation and fuel mixes, require subsidies for the market to clear, and do not incentivize adding capacity for a reserve margin. They incentivize market concentration so that generators can cross-subsidize power plants. Depending on the regulatory response, increasing wind capacity can alleviate the distortions due to the price caps. The added wind capacity, however, does not have a significant impact on the amount of coal consumed. We also find that the feed-in tariff was priced slightly higher than necessary.




Comparing Renewable Energy Policies in EU-15, U.S. and China: A Bayesian DSGE Model

Amedeo Argentiero, Tarek Atalla, Simona Bigerna, Silvia Micheli, and Paolo Polinori

DOI: 10.5547/01956574.38.SI1.aarg
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Abstract:
The promotion of renewable energy sources (RES) by governments is one way of helping countries to meet their energy needs while lowering greenhouse gas emissions. In this paper, we examine the role of energy policy in RES promotion, based on a carbon tax and RES price subsidy, at a time of technological and demand shocks in the European Union (E.U.) 15 countries, the United States (U.S.) and China, focusing on the macroeconomic implications. Using a dynamic stochastic general equilibrium model for RES and fossil fuels, our results suggest that, in the presence of a total factor productivity shock in the fossil fuel sector, such an energy policy can also be a driving force for smoothing the reduction of RES in the energy market (and vice versa). Additionally, we show that the E.U.15 grouping has a comparative advantage in terms of reaching grid parity compared with the other countries we considered which are more fossil fuel dependent.




Pricing Electricity and Supporting Renewables in Heavily Energy Subsidized Economies

David M. Newbery

DOI: 10.5547/01956574.38.SI1.dnew
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Abstract:
Heavily Energy Subsidized Economies' energy subsidies cost the budget on average 4% of GDP in 2014. Resource rents permit administratively undemanding transfers to citizens to maintain political support, whose removal will be resisted, despite resulting inefficient consumption and lock-in risk. Collapsing energy prices delivering severe fiscal shocks combined with growing concerns over climate change damage make carefully designed reforms both urgent and politically more acceptable. Political logic suggests designing reforms that compensate vocal interest groups. The paper presents evidence on the magnitude and impacts of oil, gas and electricity subsidies, and discusses how the electricity sector can be weaned off subsidies, enabling CCGTs and unsubsidized renewables to reduce carbon emissions.




Analyzing the Effects of Renewable Energy and Climate Conditions on Consumer Welfare

Tarek Atalla, Simona Bigerna, Carlo Andrea Bollino, and Rolando Fuentes

DOI: 10.5547/01956574.38.SI1.tata
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Abstract:
This paper aims to measure the impact of the gradual adoption of Renewable Energy Sources (RES) on the welfare of consumers. To this end, we construct a theoretically founded measure of the true cost of living (TCL) and the equivalence scale (ES) for the household sector, based on a weather database of heating and cooling degree days. We estimate those values for 64 countries, which represent over two-thirds of the world population, according to World Bank statistics. We assume that the identified household in each country minimizes its expenditure on energy and other goods. We simulate alternate scenarios of renewables implementation in 2035, taking account of different RES prices, and assess the related societal implications of a gradual transition from fossil fuels to RES. The empirical results offer policymakers a basis for designing appropriate scenarios for the deployment of renewables, with the aim of fostering consumer welfare even in the context of international negotiations.




Competition in Electricity Markets with Renewable Energy Sources

Daron Acemoglu, Ali Kakhbod, and Asuman Ozdaglar

DOI: 10.5547/01956574.38.SI1.dace
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This paper studies the effects of the diversification of energy portfolios on the merit order effect in an oligopolistic energy market. The merit order effect describes the negative impact of renewable energy, typically supplied at the low marginal cost, to the electricity market. We show when thermal generators have a diverse energy portfolio, meaning that they also control some or all of the renewable supplies, they offset the price declines due to the merit order effect because they strategically reduce their conventional energy supplies when renewable supply is high. In particular, when all renewable supply generates profits for only thermal power generators this offset is complete - meaning that the merit order effect is totally neutralized. As a consequence, diversified energy portfolios may be welfare reducing. These results are robust to the presence of forward contracts and incomplete information (with or without correlated types). We further use our full model with incomplete information to study the volatility of energy prices in the presence of intermittent and uncertain renewable supplies.




Introduction of Nodal Pricing into the new Mexican Electricity Market through FTR Allocations

Friedrich Kunz, Juan Rosellón, and Claudia Kemfert

DOI: 10.5547/01956574.38.SI1.fkun
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Abstract:
The change from a subsidized zonal pricing system to a full nodal pricing regime in the new Mexican electricity market could improve the efficiency of electricity system operation. However, resulting price modifications might also swing surplus across producers and consumers. In this paper, we calculate nodal prices for the Mexican power system and further analyze how allocations of financial transmission rights (FTRs) can be used to mitigate resulting distributional effects. The share of FTRs to be allocated to different generation plants and loads is studied as a second step of an electricity tariff subsidy reform agenda that includes, as a first step, the change to nodal pricing and, as a third step, the reformulation of actual regressive subsidies in a progressive way. We test our model in a realistic nodal price setting, based on an hourly modeling of the Mexican power system.




Crediting Wind and Solar Renewables in Electricity Capacity Markets: The Effects of Alternative Definitions upon Market Efficiency

Cynthia Bothwell and Benjamin F. Hobbs

DOI: 10.5547/01956574.38.SI1.cbot
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Abstract:
As the penetration of variable renewable energy in electricity markets grows, there is increasing need for capacity markets to account for the contribution of renew-ables to system adequacy. An important issue is the inconsistent industry definition of capacity credits for resources whose availability may be limited, such as renewable generation. Inaccurate credits can subsidize or penalize different resources, and consequently distort investment between renewables and non-renew-ables, and also among different types and locations of renewables. Using Electric Reliability Council of Texas (ERCOT) data, we use a market equilibrium model to quantify the resulting loss of efficiency due to capacity credits alone and in combination with renewable tax subsidies and portfolio standards. Layering inaccurate capacity credits with existing US federal tax subsidies decreases efficiency as much as 6.3% compared to optimal capacity crediting under those subsidies. Compensating producers based on their marginal contributions to system adequacy, considering how renewable penetration affects the timing of net load peaks, can yield an efficient capacity market design.




Economic Impacts of Renewable Energy Production in Germany

Christoph Böhringer, Florian Landis, and Miguel Angel Tovar Reaños

DOI: 10.5547/01956574.38.SI1.cboh
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Over the last decade Germany has boosted renewable energy in power production by means of massive subsidies. The flip side are very high electricity prices which raise concerns that the transition cost towards a renewable energy system will be mainly borne by poor households. In this paper, we combine computable general equilibrium and microsimulation analyses to investigate the economic impacts of Germany's renewable energy promotion. We find that the regressive effects of renewable energy promotion could be attenuated by alternative subsidy financing mechanisms.




Germany’s Energiewende: A Tale of Increasing Costs and Decreasing Willingness-To-Pay

Mark A. Andor, Manuel Frondel, and Colin Vance

DOI: 10.5547/01956574.38.SI1.mand
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This paper presents evidence that the accumulating cost of Germany's ambitious plan to transform its system of energy provision - the so-called Energiewende - is butting up against consumers' willingness-to-pay (WTP) for it. Following a descriptive presentation that traces the German promotion of renewable energy technologies since 2000, we draw on two stated-preference surveys conducted in 2013 and 2015 that elicit the households' WTP for green electricity. Two models are estimated, one based on a closed-ended question framed around Germany's target of 35% renewable energy in electricity provision by 2020, and the other on an open-ended format that captures changes in WTP over time. To deal with the bias that typifies hypothetical responses, the models distinguish respondents according to whether they express definite certainty in their reported WTP. The results from both models reveal a strong contrast between the households' general acceptance of supporting renewable energy technologies and their own WTP for green electricity.




Auction Schemes, Bidding Strategies and the Cost-Optimal Level of Promoting Renewable Electricity in Germany

Andreas Voss and Reinhard Madlener

DOI: 10.5547/01956574.38.SI1.avos
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Abstract:
Germany is among the leading countries regarding the promotion of renewable energy towards a sustainable energy system transition. In this paper, we investigate the German pilot auction scheme for solar photovoltaics introduced in the Renewable Energies Act 2014 (EEG 2014) that serves as a pilot for the auction-based promotion of the three major large-scale renewable electricity generation technologies (wind, solar, biomass) as of 2017. A strategic bidding model is used to determine the optimal bidding strategy and to determine the resulting project value. We consider pay-as-bid and uniform pricing and single and multiple bids. Moreover, we investigate the impact of investment cost uncertainty. In a sensitivity analysis we show how bid strategy adjustments affect the outcome. Specifically, higher uncertainty regarding the market clearing price increases the project value, as this additional uncertainty can be used to raise the probability of obtaining a higher level of remuneration by an adjusted auction strategy. The first-price auction can generate additional profits by placing a second, higher bid with a low probability of success. Investment cost uncertainty can have either a positive or negative impact on the project value, depending on the auction parameter values chosen.