Tradable Permits with Incomplete Monitoring: Evidence from Santiago’s Particulate Permits Program

I explore the advantages of tradable emission permits over uniform emission standards when the regulator has incomplete information on firms’ emissions and costs of production and abatement (e.g., air pollution in large cities). Because the regulator only observes each firm’s abatement technology but neither its emissions nor its output, there are cases in which standards can lead to lower emissions and, hence, welfare dominate permits. I then empirically examine these issues using evidence from a particulate permits market in Santiago, Chile.asymmetric information, imperfect monitoring, pollution markets, permits

'Core Indicators for Determinants and Performance of Electricity Sector in Developing Countries’

Since the early 1990s, substantial resources and effort have been spent on implementing market-oriented electricity reform in developing countries. Important sectoral, economic, and social dimensions are involved in electricity reform, but empirical analysis and evaluation have been of limited use for testing the economic rationale of reform and policy advice. This may partly be attributed to a lack of generally accepted and measured indicators for monitoring progress, impact and performance, unlike areas such as health, education, environment, sustainable development. In this paper we propose a set of indicators as a first step towards filling this gap and developing a coherent framework for studying electricity reform in developing countries covering resource and institutional endowments, key reform steps, market structure, performance, and various impacts.Electricity, Reform, developing countries

A Comparison of Electricity Market Designs in Networks

In the real world two classes of market designs are implemented to trade electricity in transmission constrained networks. Analytical results show that in two node networks integrated market designs reduce the ability of electricity generators to exercise market power relative to separated market designs. In multi node networks countervailing effects make an analytic analysis difficult. We present a formulation of both market designs as an equilibrium problem with equilibrium constraints. We find that in a realistic network, prices are lower with the integrated market design.

‘UK domestic energy contracts, the 28 day rule, and experience in Sweden’

In the UK, domestic customers must be able to terminate energy contracts at 28 days’ notice. This has been seen as a transitional protection for customers and for competition. This paper reviews the arguments for and against the 28 day rule, and examines the extent to which UK suppliers have offered fixed-price fixed-term contracts. It also looks at experience in Sweden, where there is no such restriction and where there is greater use of fixed-price fixed-term contracts. The paper concludes that there is no longer a need for the 28 day rule to protect customers, and that it is more likely to restrict than to protect competition.competition, electricity, regulation

Electricity Liberalisation in Britain: the quest for a satisfactory wholesale market design

Britain was the exemplar of electricity market reform, demonstrating the importance of ownership unbundling and workable competition in generation and supply. Privatisation created de facto duopolies that supported increasing price-cost margins and induced excessive (English) entry. Concentration was ended by trading horizontal for vertical integration in subsequent mergers. Competition arrived just as the Pool was replaced by New Electricity Trading Arrangements (NETA) intended to address its claimed shortcomings. NETA cost over £700 million, and had ambiguous market impacts. Prices fell dramatically as a result of (pre-NETA) competition, generating companies withdrew plant, causing fears about security of supply and a subsequent widening of price-cost margins.electricity, liberalisation, market design, market power

Auctions to gas transmission access: The British experience

When access to monopoly owned networks is constrained auctioning access rights can increase the efficiency of allocations relative to negotiation and grandfathering when there is sufficient competition among network users. Historically, access rights to entry capacity on the British gas network were granted by the monopoly network owner via negotiation; rights were later based on regulated tariffs with an increasing reliance on market based constraint resolution by the system operator. In 1999 an auction mechanism for allocating rights was introduced. Comparing the different allocation methods we conclude that where there is competition at entry terminals auctions have been successful with respect to anticipating spot prices, capturing producer rents and reducing the costs of alleviating network constraints. Moreover, auctions are more transparent and better facilitate entry.gas, network, access, auction, regulation

‘Did English Generators Play Cournot? Capacity Withholding in the Electricity Pool’

Electricity generators can raise the price of power by withholding their plant from the market. We discuss two ways in which this could have affected prices in the England and Wales Pool. Withholding low-cost capacity that should be generating will raise energy prices but make the pattern of generation less efficient. This pattern improved significantly after privatisation. Withholding capacity that was not expected to generate would raise the Capacity Payments based on spare capacity. On a multi-year basis, these did not usually exceed ‘competitive’ levels, the cost of keeping stations open. The evidence for large-scale capacity withholding is weak.Electricity prices, Cournot competition, capacity withholding

Recent blackouts in US and continental Europe: is liberalisation to blame?

The paper starts with a detailed technical overview of recent blackouts in the US, Sweden/Denmark and Italy in order to analyse common threads and lessons to be learnt. The blackouts have exposed a number of challenges facing utilities worldwide. Increased liberalisation of electricity supply industry has resulted in a significant increase in inter-area (or cross-border) trades which often are not properly accounted for when assessing system security. The traditional decentralised way of operating systems by TSOs, with each TSO looking after its own control area and little information exchange, resulted in inadequate and slow response to contingencies. A new mode of coordinated operation for real-time security assessment and control is needed in order to maintain system security. This new mode of operation requires overcoming a number of organisational, psychological, legal and technical challenges but the alternative is either to risk another blackout or run the interconnected system very conservatively, maintaining large security margin at a high cost to everyone. The paper also includes technical appendices explaining engineering power system concepts to non-engineering audience.electricity, USA, Sweden, Denmark