Environmental policies in competitive electricity markets

R. Langestraat

Research output: ThesisDoctoral Thesis

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Abstract

In this thesis we model and analyze several environmental policies in an existing mathematical representation of a perfectly competitive electricity market. We contribute to the literature by theoretically and numerically establishing a number of effects of environmental policies on investment strategies and prices. We provide a theoretical benchmark for environmental regulators aiming to achieve certain policy goals, and present a way to use numerical tools in case a complete theoretical analysis cannot be obtained. Two policies that charge firms for their carbon emissions, namely cap-and-trade and carbon taxation, are modeled into both a stylized deterministic and a two-stage stochastic framework. In the former we characterize equilibria, leading to key results on the dispatching order of technologies and identification of unused technologies. The latter framework is analyzed through a sampling study and focuses on the effectiveness of the policies in the presence of network limitations. We successively study a renewable energy obligation, which indirectly subsidizes electricity production from renewable resources through green certificates. We additionally explore the effects of technology banding, meaning that different renewable technologies are eligible for a different number of certificates. To account for some of the drawbacks of the existing UK technology banding system, we introduce an alternative banding policy. Finally, a feed-in tariff (FIT) is a direct subsidy on electricity production from renewable resources. In a stochastic framework we derive analytically that under linear cost assumptions, this price based instrument cannot guarantee that quantity based policy targets are met. Assuming non-linear convex cost, we find that the opposite holds and that a regulator has the freedom to set FITs in such a way that any desired mixture of renewable technologies can be attained at equilibrium. These FITs are derived analytically or, when necessary, estimated using the numerical tools that we propose.
Original languageEnglish
QualificationDoctor of Philosophy
Awarding Institution
  • Tilburg University
Supervisors/Advisors
  • Kort, Peter, Promotor
  • Talman, A.J.J., Promotor
  • Gurkan, Gul, Co-promotor
Award date17 Dec 2013
Place of PublicationTilburg
Publisher
Print ISBNs9789056683740
Publication statusPublished - 2013

Fingerprint

Electricity market
Environmental policy
Electricity
Renewable resources
Costs
Benchmark
Tariffs
Dispatching
Theoretical analysis
Carbon
Investment strategy
Carbon emissions
Renewable energy
Subsidies
Obligation
Taxation
Technology system
Cap and trade
Charge
Guarantee

Cite this

Langestraat, R. (2013). Environmental policies in competitive electricity markets. Tilburg: CentER, Center for Economic Research.
Langestraat, R.. / Environmental policies in competitive electricity markets. Tilburg : CentER, Center for Economic Research, 2013. 194 p.
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Langestraat, R 2013, 'Environmental policies in competitive electricity markets', Doctor of Philosophy, Tilburg University, Tilburg.

Environmental policies in competitive electricity markets. / Langestraat, R.

Tilburg : CentER, Center for Economic Research, 2013. 194 p.

Research output: ThesisDoctoral Thesis

TY - THES

T1 - Environmental policies in competitive electricity markets

AU - Langestraat, R.

PY - 2013

Y1 - 2013

N2 - In this thesis we model and analyze several environmental policies in an existing mathematical representation of a perfectly competitive electricity market. We contribute to the literature by theoretically and numerically establishing a number of effects of environmental policies on investment strategies and prices. We provide a theoretical benchmark for environmental regulators aiming to achieve certain policy goals, and present a way to use numerical tools in case a complete theoretical analysis cannot be obtained. Two policies that charge firms for their carbon emissions, namely cap-and-trade and carbon taxation, are modeled into both a stylized deterministic and a two-stage stochastic framework. In the former we characterize equilibria, leading to key results on the dispatching order of technologies and identification of unused technologies. The latter framework is analyzed through a sampling study and focuses on the effectiveness of the policies in the presence of network limitations. We successively study a renewable energy obligation, which indirectly subsidizes electricity production from renewable resources through green certificates. We additionally explore the effects of technology banding, meaning that different renewable technologies are eligible for a different number of certificates. To account for some of the drawbacks of the existing UK technology banding system, we introduce an alternative banding policy. Finally, a feed-in tariff (FIT) is a direct subsidy on electricity production from renewable resources. In a stochastic framework we derive analytically that under linear cost assumptions, this price based instrument cannot guarantee that quantity based policy targets are met. Assuming non-linear convex cost, we find that the opposite holds and that a regulator has the freedom to set FITs in such a way that any desired mixture of renewable technologies can be attained at equilibrium. These FITs are derived analytically or, when necessary, estimated using the numerical tools that we propose.

AB - In this thesis we model and analyze several environmental policies in an existing mathematical representation of a perfectly competitive electricity market. We contribute to the literature by theoretically and numerically establishing a number of effects of environmental policies on investment strategies and prices. We provide a theoretical benchmark for environmental regulators aiming to achieve certain policy goals, and present a way to use numerical tools in case a complete theoretical analysis cannot be obtained. Two policies that charge firms for their carbon emissions, namely cap-and-trade and carbon taxation, are modeled into both a stylized deterministic and a two-stage stochastic framework. In the former we characterize equilibria, leading to key results on the dispatching order of technologies and identification of unused technologies. The latter framework is analyzed through a sampling study and focuses on the effectiveness of the policies in the presence of network limitations. We successively study a renewable energy obligation, which indirectly subsidizes electricity production from renewable resources through green certificates. We additionally explore the effects of technology banding, meaning that different renewable technologies are eligible for a different number of certificates. To account for some of the drawbacks of the existing UK technology banding system, we introduce an alternative banding policy. Finally, a feed-in tariff (FIT) is a direct subsidy on electricity production from renewable resources. In a stochastic framework we derive analytically that under linear cost assumptions, this price based instrument cannot guarantee that quantity based policy targets are met. Assuming non-linear convex cost, we find that the opposite holds and that a regulator has the freedom to set FITs in such a way that any desired mixture of renewable technologies can be attained at equilibrium. These FITs are derived analytically or, when necessary, estimated using the numerical tools that we propose.

M3 - Doctoral Thesis

SN - 9789056683740

T3 - CentER Dissertation Series

PB - CentER, Center for Economic Research

CY - Tilburg

ER -

Langestraat R. Environmental policies in competitive electricity markets. Tilburg: CentER, Center for Economic Research, 2013. 194 p. (CentER Dissertation Series).