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The Short-Run Effects of Time-Varying Prices in Competitive Electricity Markets

Stephen P. Holland and Erin T. Mansur

Year: 2006
Volume: Volume 27
Number: Number 4
DOI: 10.5547/ISSN0195-6574-EJ-Vol27-No4-6
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We analyze the efficiency, distributional, and environmental effects of real-time pricing (RTP) adoption in the short run. Consistent with theory, our simulations of the PJM electricity market show that RTP adoption improves efficiency and compresses the distributions of loads and prices. Adoption increases average load but decreases operating profits with the largest decrease for oil-fired generation (59% when all customers adopt). Consumer surplus and welfare gains are modest (2.5% and 0.24% of the energy bill), and emissions of SO2 and NOx increase but CO2 emissions decrease. Approximately 30% of these efficiency gains could be captured by varying flat rates monthly instead of annually. Monthly flat rate adjustment has many of the same effects as RTP adoption, captures more of the deadweight loss than time of use (TOU) rates, and requires no new metering technology.

Modeling Peak Oil

Stephen P. Holland

Year: 2008
Volume: Volume 29
Number: Number 2
DOI: 10.5547/ISSN0195-6574-EJ-Vol29-No2-4
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Peak oil refers to the future decline in world production of crude oil and to the accompanying potentially calamitous effects. The majority of the literature on peak oil is non-economic and ignores price effects even when analyzing policies. Unfortunately, most economic models of depletable resources do not generate production peaks. I present four models which generate production peaks in equilibrium. Production increases in the models are driven by: demand increases, cost reductions through advancing technology, cost reductions through reserve additions, and production capacity increases through site development. Production decreases are driven by scarcity. The models do not rely on market failures and indicate that a peak in production may arise from efficient intertemporal optimization. The models show that prices are a better indicator of impending scarcity than peaking is and that peak production can occur when any percentage from 0-100% of the original deposit remains.

Unintended Consequences of Carbon Policies: Transportation Fuels, Land-Use, Emissions, and Innovation

Stephen P. Holland, Jonathan E. Hughes, Christopher R. Knittel, Nathan C. Parker

Year: 2015
Volume: Volume 36
Number: Number 3
DOI: 10.5547/01956574.36.3.shol
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Renewable fuel standards, low carbon fuel standards, and ethanol subsidies are popular policies to incentivize ethanol production and reduce emissions from transportation. Compared to carbon trading, these policies lead to large shifts in agricultural activity and unexpected social costs. We simulate the 2022 Federal Renewable Fuel Standard (RFS) and find that energy crop production increases by 39 million acres. Land-use costs from erosion and habitat loss are between $277 and $693 million. A low carbon fuel standard (LCFS) and ethanol subsidies have similar effects while costs under an equivalent cap and trade (CAT) system are essentially zero. In addition, the alternatives to CAT magnify errors in assigning emissions rates to fuels and can over or under-incentivize innovation. These results highlight the potential negative effects of the RFS, LCFS and subsidies, effects that would be less severe under a CAT policy.

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