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Investments in Imperfect Power Markets under Carbon Pricing: A Case Study Based Analysis

Michael Pahle, Kai Lessmann, Ottmar Edenhofer, and Nico Bauer

Year: 2013
Volume: Volume 34
Number: Number 4
DOI: 10.5547/01956574.34.4.10
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Abstract:
This article addresses the question of how investments in imperfectly competitive electricity markets interact with a price on carbon. The analysis is based on a dynamic numerical Cournot model calibrated to the German market and focuses on (a) the level of investments and technology choice and (b) welfare impacts under optimal carbon pricing. As a special feature, we also restrict access to one technology (coal) to strategic players ("technological market power"). The main results are: (a) In the long-run prices reach competitive levels due to entry by the competitive fringe. If technological market power prevails, this can only be accomplished through high carbon prices. (b) Investment levels and technology choice show different patterns under market power and perfect competition. (c) Apart from driving investments, carbon pricing also renders old carbon-intensive capacities unprofitable and thus induces more extensive fleet turnover. (d) Welfare almost always increases as a result of carbon pricing.



Renewable Energy Support, Negative Prices, and Real-time Pricing

Michael Pahle, Wolf-Peter Schill, Christian Gambardella, and Oliver Tietjen

Year: 2016
Volume: Volume 37
Number: Sustainable Infrastructure Development and Cross-Border Coordination
DOI: https://doi.org/10.5547/01956574.37.SI3.mpah
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Abstract:
We analyze the welfare effects of two different renewable support schemes designed to achieve a given target for the share of fluctuating renewable electricity generation: a feed-in premium (FiP), which can induce negative wholesale prices, and a capacity premium (CP), which does not. For doing so we use a stylized economic model that differentiates between real-time and flat-rate pricing and is loosely calibrated on German market data. Counter-intuitively, we find that distortions through induced negative prices do not reduce the net consumer surplus of the FiP relative to the CP. Rather, the FiP performs better under all assumptions considered. The reason is that increased use of renewables under the FiP, particularly in periods of negative prices, leads to a reduction of required renewable capacity and respective costs. This effect dominates larger deadweight losses of consumer surplus generated by the FiP compared to the CP. Furthermore, surplus gains experienced by consumers who switch from flat-rate to real-time pricing are markedly higher under the FiP, which might be interpreted as greater incentives to enable such switching. While our findings are primarily of theoretical nature and the full range of implications of negative prices needs to be carefully considered, we hope that our analysis makes policy-makers more considerate of their potential benefits.





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