CO2 cost pass through and windfall profits in the power sector’

This paper analyses the implications of the EU ETS for the power sector, notably the impact of free allocation of CO2 emission allowances on the price of electricity and the profitability of power generation. Besides some theoretical reflections, the paper presents empirical and model estimates of CO2 cost pass through, indicating that pass through rates vary between 40 and 100 percent of CO2 costs, or – in absolute terms – between 3 and 18 €/MWh, depending on the carbon intensity of the marginal production unit and other, market or technology specific factors concerned. As a result, power companies realise substantial windfall profits, indicated by empirical and model estimates presented in the paper. In order to avoid these windfall profits, the paper concludes that free allocation to power companies should be phased out in favour of auctioning

A game theoretic model for generation capacity adequacy in electricity markets: A comparison between investment incentive mechanisms

Working Paper GATE 2009-05In this paper we study the problem of long-term capacity adequacy in electricity markets. We implement a dynamic model in which operators compete for investment and electricity production under imperfect Cournot competition. The main aim of this work is tocompare three investment incentive mechanisms: reliability options, forward capacity market - which are both market-based - and capacity payments. Apart from the oligopoly case, we also analyze collusion and monopoly cases. Stochastic dynamic programming is used to deal with the stochastic environment of the market (future demand) and mixed complementarityproblem formulation is employed to find a solution to this game. The main finding of this study is that market-based mechanisms would be the most cost-efficient mechanism for assuring long-term system adequacy and encouraging earlier and adequate new investments in the system. Moreover, generators would exert market power when introducing capacity payments. Finally, compared with a Cournot oligopoly, collusion and monopolistic situations lead to more installed capacities with market-based mechanisms and increase end-users' payments

The Economics of International Coal Markets

In the scope of four related essays this thesis analyses the Chinese domestic coal sector and coal trade policies and their respective impact on international steam coal trade economics. In particular, the thesis investigates the role of domestic transport infrastructure investment policies as well as Chinese coal export and import controls and the potential exertion of market power through such trade instruments. For this purpose, several spatial equilibrium models have been developed that enable simulation runs to compare different policy scenarios. These models also permit ex-post analyses to empirically test hypotheses of non-competitive market conduct of individual players under the assumption of Cournot behaviour. These model-based analyses yield, among others, the following findings: If coal is converted into electricity early in the Chinese energy supply chain, worldwide marginal costs of supply are substantially lower than if coal is transported via railway. This can reduce China's dependence on international imports significantly. Allocation of welfare changes, particularly in favour of Chinese consumers while rents of international producers decrease. If not only seaborne trade but also interactions and feedbacks between domestic coal markets and international trade markets are accounted for, trade volumes and prices of a China - Indonesia duopoly fit the real market outcome best in 2008. Real Chinese export quotas have been consistent with simulated exports under a Cournot-Nash strategy. Uncertainties with regard to future Chinese coal demand and coal sector policies generate significant costs for international investors and lead to a spatial and temporal reallocation of mining and infrastructure investments. The potential exertion of Chinese demand side market power would further reduce the overall investment activity of exporters