Impact of the allowance allocation on prices and efficiency

Successful cap and trade programs for SO2 and NOx in the US allocate allowances to large emitters based on a historic base line for a period of up to thirty years. National Allocation Plans in Europe allocate CO2 allowances in an iterative approach first for a three then for a five-year period. The potential updating of the base line creates perverse incentives for operation and investment. Some allowances are also reserved for new entrants further distorting the scheme. We use analytic models and numeric simulations for the UK power sector to illustrate and quantify how these effects contribute to an inflation of the allowance price while reducing utilisation and investment in efficient technologies. The inflated allowance prices are likely to increase the European allowance budget and emissions, e.g. through the Linking Directive. As a result opportunity costs of emitting CO2 are reduced relative to an efficient cap and trade program

China’s Electricity Market Reform and Power Plants Efficiency

In the past three decades, Chinese electricity industry has experienced a series of regulatory reforms serving different purposes at different stages. In 2002, the former vertically integrated electricity utility - the State Power Corporation (SPC) – was divested and the generation sector was separated from the transmission and distribution networks in an effort to improve production efficiency. In this paper we study the impact of the reform on efficiency of fossil-fired power plants using plant-level data during 2000-2008. Our results from the data envelopment analysis (DEA) and panel regressions show that: 1) the total factor productivity (TFP) growth mainly comes from technological change; 2) the technical efficiency of previously SPC-managed power plants is converging to that of better-performing independent power producers (IPPs); 3) capacity utilization and unit size are significant factors affecting changes in technical efficiency and the pattern of converging technical efficiency between the two kinds of power plants; 4) most plants operate at increasing returns to scale indicating further cost savings could be achieved through increasing output.Efficiency, DEA, Malmquist Index, China, Electricity, Industrial Organization, Productivity Analysis, Resource /Energy Economics and Policy, D24, L11, L51, L94, L98,

Transition Support Mechanisms for Communities Facing Full or Partial Coal Power Plant Retirement in New York

New York State is undergoing a rapid and unprecedented energy transformation, particularly in the electricity sector. As new resources and technologies emerge to meet the demands of 21st century life, regulators must balance the need for cost effective and equitable participation in wholesale power markets while maintaining reliability on the grid. Furthermore, it is critical that all New Yorkers participate fully in the promise of a revitalized and equitable energy future. Such a transformation requires that the needs of all communities are factored into the polices and regulations that move New York toward the bold goals set forth under its Reforming the Energy Vision (REV) initiative. The precipitous drop in natural gas prices, the decreased costs of wind and solar energy, and the rise in the cost of coal, have contributed to the mothballing or retiring of coal-fired and nuclear energy generators across the country, including in New York. Communities that have been home to the electric generation units of the past, particularly struggling coal-fired power plants, are especially vulnerable during this transformation, because these communities often rely on the generators for tax revenues, such as through Payments in Lieu of Tax agreements. New York has the opportunity to ensure a just transition for these communities by adopting new, clean energy resources, technologies, and markets while fostering a trained and skilled workforce to support its ambitious goals. For all New Yorkers to enjoy the new energy future, leadership must address the impact of lost jobs, declining economic activity and lost tax revenue, and must support essential services in impacted communities with the same level of urgency and expansive vision needed to balance the integration of new technologies in the most cost effective manner to maintain grid reliability. At the same time, state and federal funding must be allocated to communities in transition for the remediation and redevelopment of shuttered power plant sites, and to provide the necessary support, training and tools for impacted communities to actively participate in the transition and implementation of clean energy resources. The first section of this report examines the lessons learned from other jurisdictions in when and how to address the fiscal challenges of retiring electric generation units (EGU’s). The challenges New York faces are not unlike the challenges faced by communities, legislators, and plant owners during periods of deindustrialization of the late 1960’s through 1980’s, described in Section One below, which additionally provides: 1. An evaluation of case studies that address the process of retirement, decommissioning, remediation and preparation for redevelopment for future use, along with the state and federal policies and funding sources that made revitalization possible. 2. An overview of case studies that illustrate local government fiscal and workforce support to communities during periods of plant transformation. These periods encompass three historical phases: a. Deindustrialization of the 1960’s to1980’s; b. Federally Mandated Social Programs to Support Enforcement of Federal Regulations 1990’s to 2000; and c. Coal Plant Closures and Community Transition in the Age of Carbon Emissions Reductions: Federal and State Initiatives between 2000 to 2015; and Section Two examines four New York coal-fired generators, some of which are currently mothballed, retired, or struggling financially. In addition to providing profiles of each generator, Section Two also describes the Payment in Lieu of Taxes (PILOT) agreements that these generators have entered into with the towns, school boards, and counties in whose jurisdictions they are located. Due to the plants’ finances, several of the generators have made reduced PILOT payments in recent years, creating “budget gaps” for some of the communities. Finally, Section Three describes state and federal funding and support mechanisms that may be available to the New York communities described in Section Two. Because each community faces unique challenges and opportunities, this report does not attempt to provide specific recommendations for any of the communities. Rather, Section Three lists a number of support mechanisms that each community could consider in developing its own transition plan. New York State leadership can capitalize on the legislative legacy of prior eras and develop comprehensive approaches to reinvest in communities with obsolete industrial facilities that were once the primary source of jobs and economic activity, and revenue to local budgets

Armageddon: The Inevitable Death of Nuclear Power and Whether New York State Has the Legal Authority to Keep It on Life Support

This Note seeks to make the argument for New York’s ZEC program as a legitimate exercise of state power. Part I provides context—the history of nuclear power, the rise and fall in the incidence of nuclear power projects, and why such investments are failing. Part II then provides an overview of the CES and the ZEC program contained therein. In Part III, the legal challenges filed in response to Tier 3 are discussed, as well as the Illinois case which parallels the conventional generator challenge in New York. Part III will also discuss relevant legal precedent the cases concern, namely the recent United States Supreme Court case, Hughes v. Talen Energy Marketing, LLC. Part IV analyzes federal preemption to the extent it affects the New York program. This analysis mirrors—and in some areas, expands upon—the district court’s findings regarding New York’s program. Further, it compares similar crediting mechanisms currently used across the United States and other analogs demonstrating that, although federal preemption appears to control, there is significant room for the states to regulate. This Note ultimately concludes in Part V that the ZEC program is likely a legitimate exercise of state power, despite incidental effects it may have on related federal regulation

Allocation and competitiveness in the EU emissions trading scheme: policy overview

The European emissions trading scheme (EU ETS) has an efficient and effective market design that risks being undermined by three interrelated problems: the approach to allocation; the absence of a credible commitment to post-2012 continuation; and concerns about its impact on the international competitiveness of key sectors. This special issue of Climate Policy explores these three factors in depth. This policy overview summarizes key insights from the individual studies in this issue, and draws overall policy conclusions about the next round of allocations and the design of the system for the longer term

Auctions and trading in energy markets -- an economic analysis

Auctions are playing an increasingly prominent role in the planning and operation of energy markets. Comparing the New Electricity Trading Arrangements to the former electricity Pool in England and Wales requires some analysis of the relative merits of uniform versus discriminatory pricing rules, and use of the gas network in Britain and electricity interconnectors around Europe is allocated on the basis of auction results. In this paper we discuss the changes in the trading arrangements in the electricity industry in England and Wales as well as some of the results to date. We also look at the wider issue of using auctions to replace regulation by market solutions for managing the natural monopolies in energy markets.auctions, electricity, gas, interconnectors, networks

The Economics of Wholesale Electricity Markets

This dissertation is based on four articles. Chapter 2 is based on Growitsch and Müsgens (2005). In this chapter, we analyze the development of household electricity prices since the liberalization of the market in 1998. The chapter covers all components of the price, the wholesale component, and the transportation and distribution networks. We also discuss the developments of taxes and subsidies in the electricity market. The main result is that the liberalization appears to have had no significant impact on total consumer prices, as prices in 2004 are nearly the same as in 1998. However, a deeper analysis reveals significant differences between the price components: wholesale prices, which are at the focus of the other chapters in this dissertation, decreased significantly directly after the liberalization took place, but increased from 2001 to 2004. The latter effect is discussed in chapter 3. Despite this increase, wholesale prices are still lower in 2004 than they were in 1998. The costs for transportation and distribution networks decreased slightly but steadily over time. The prices of other cost components (Renewable energy act, CHP subsidies, taxes ), however, rose sharply after the liberalization. This result has serious implications, as it means that insubstantial reductions in household prices do not reveal much about the success of liberalization or the behavior of the electricity supply industry. Chapter 3 is based on Müsgens (2007). The chapter presents a model to calculate system marginal costs in electricity markets. The model is a dynamic linear optimization model including start-up costs, hydro storage and pump storage dispatch, and international power exchange in the equations. We apply this model to the German power exchange for the period from June 2000 to June 2003 and perform a competitive benchmarking study. We find that prices are very close to our model-derived competitive benchmark in a first period until August 2001: the difference between prices and benchmark is only 2% in this period. In the following period, observed market prices rise significantly; this rise is not reflected in the competitive benchmark: prices are nearly 50% above the competitive benchmark in this second period. We also show that this deviation mainly comes from the high demand periods in which capacity is scarce. This is in accordance with the theories of market power. Furthermore, the chapter contains several scenarios quantifying the price effects of non-convexities and other dynamic elements. Chapter 4 is based on Müsgens and Neuhoff (2005). As in chapter 3, we present a linear optimization model to determine the optimal dispatch. The model is extended to allow the analysis of the uncertainty brought into the market by wind power generation. We represent uncertainty by applying stochastic programming with recourse. We parameterize the model with historical data from the German power market and find that the short term costs for the integration of wind power are low, as there is sufficient capacity during most periods to provide balancing services. Chapter 5 is based on Kuntz and Müsgens (2005). The chapter presents a formal in-depth analysis of the effects of start-up costs on electricity markets. The chapter starts from a simplified version of the optimization problem in chapter 4. Using appropriate transformations (dualization of the original problem, rephrasing the dual and reconverting it into a modified primal problem), we can prove that the impact of start-up costs on the average price is very small, which was already suggested by the empirical analyses in chapters 3 and 4. Chapter 6 concludes the dissertation