Building Blocks: Investment in Renewable and Non-Renewable Technologies

Over the last several years, there has been a nation-wide intensification of policies directed at increasing the level of renewable sources of electricity.  These environmental policy changes have occurred against a backdrop of shifting economic regulation in power markets that has fundamentally redefined the mechanisms through which investors in power plants earn revenues. Rather than base payments upon costs, revenues in many regions are now based upon fluctuating energy prices and, in some cases, supplemental payments for installed capacity. This paper studies the interaction between these two major forces that are currently dominating the economic landscape of the electricity industry.  Using data from the western U.S., we examine how the large-scale expansion of intermittent resources of generation could influence long-run equilibrium prices and investment decisions under differing wholesale power market designs.  We find that as the level of wind penetration increases, the equilibrium investment mix of other resources shifts towards less baseload and more peaking capacity.  As wind penetration increases, an “average” wind producer earns increasingly more revenue under markets with capacity payments than those that base compensation on energy revenues.   Investment; Renewable Energy; Capacity Markets

Climate policies for road transport revisited (II): Closing the policy gap with cap-and-trade

Current policies in the road transport sector fail to deliver consistent and efficient incentives for greenhouse gas abatement (see companion article by Creutzig et al., 2010a). Market-based instruments such as cap-and-trade systems close this policy gap and are complementary to traditional policies which are required where specific market failures arise. Even in presence of strong existing non-market policies, cap-and-trade delivers additional abatement and efficiency by incentivizing demand side abatement options. This paper analyzes generic design options and economic impacts of including the European road transport sector to the EU ETS. The point of regulation in a road transport cap-and-trade system should be upstream in the fuel chain to ensure effectiveness (cover all life-cycle emissions and avoid double-counting), efficiency (incentivize all abatement options) and low transaction costs. Based on year 2020 marginal abatement cost curves from different models and current EU climate policy objectives we show that in contrast to conventional wisdom road transport inclusion would not change the EU ETS allowance price. This puts concerns over industrial carbon leakage as a consequence of adding road transport to the EU ETS into perspective.Climate Policy, Road Transport, Cap-and-trade

Radiative Forcing: Climate Policy to Break the Logjam in Environmental Law

This article recommends the key design elements of US climate law. Much past environmental law has suffered from four design problems: fragmentation, insensitivity to tradeoffs, rigid prescriptive commands, and mismatched scale. These are problems with the design of regulatory systems, not a rejection of the overall objective of environmental law to protect ecosystems and human health. These four design defects raised the costs, reduced the benefits, and increased the countervailing risks of many past environmental laws. The principal environmental laws successfully enacted since the 1990s, such as the acid rain trading program in the 1990 Clean Air Act (CAA) Amendments and the 1996 Safe Drinking Water Act amendments, were consciously designed to overcome the prior design defects. New law for climate change should improve on the design of past environmental law, fostering four counterpart solutions to the prior design defects: cross-cutting integration instead of fragmentation, attention to tradeoffs instead of their neglect, flexible incentive-based policy instruments such as emissions trading in place of rigid prescriptive commands, and optimal instead of mismatched scale. This article advocates a design for U.S. climate policy that embodies these four design solutions. It proposes a policy that is comprehensive in its coverage of multiple pollutants (all GHGs), their sources and sinks; multiple sectors (indeed economy-wide); and multiple issues currently divided among separate agencies. It advocates explicit attention to tradeoffs, both benefit-cost and risk-risk (including both ancillary harms and ancillary benefits), in setting the goals and boundaries of climate policy. It advocates the use of flexible market-based incentives through an efficient cap-and-trade system, with most allowances auctioned along multi-year emissions reduction schedules that are reviewed periodically in light of new information. And it advocates matching the legal regime to the environmental and economic scale of the climate problem, starting at the global level, engaging all the major emitting countries (including the U.S. and China), and then implementing at the national and sub-national levels rather than a patchwork bottom-up approach. In so doing it addresses the roles of EPA regulation under the current CAA and of new legislation. It argues that among environmental issues, climate change is ideally suited to adopt these improved policy design features

Electricity transmission: an overview of the current debate

Electricity transmission has emerged as critical for successfully liberalising powermarkets. This paper surveys the issues currently under discussion and provides a framework for the remaining papers in this issue. We conclude that signalling the efficient location of generation investment might require even a competitive LMP system to be complemented with deep connection charges. Although a Europe-wide LMP system is desirable, it appears politically problematic, so an integrated system of market coupling, possibly evolving by voluntary participation, should have high priority. Merchant investors may be able to increase interconnector capacity, although this is not unproblematic and raises new regulatory issues. A key issue that needs further research is how to better incentivize TSOs, especially with respect to cross-border issues

Optimal Carbon Taxes for Emissions Targets in the Electricity Sector

The most dangerous effects of anthropogenic climate change can be mitigated by using emissions taxes or other regulatory interventions to reduce greenhouse gas (GHG) emissions. This paper takes a regulatory viewpoint and describes the Weighted Sum Bisection method to determine the lowest emission tax rate that can reduce the anticipated emissions of the power sector below a prescribed, regulatorily-defined target. This bi-level method accounts for a variety of operating conditions via stochastic programming and remains computationally tractable for realistically large planning test systems, even when binary commitment decisions and multi-period constraints on conventional generators are considered. Case studies on a modified ISO New England test system demonstrate that this method reliably finds the minimum tax rate that meets emissions targets. In addition, it investigates the relationship between system investments and the tax-setting process. Introducing GHG emissions taxes increases the value proposition for investment in new cleaner generation, transmission, and energy efficiency; conversely, investing in these technologies reduces the tax rate required to reach a given emissions target

Regulatory Policies and Reforms in the Power and Downstream Oil Industries

This paper looks at the regulatory reforms in the electricity and downstream oil industries, two important inputs to the production process that were heavily regulated by the government. While electricity has strong externalities as well as economies of scale and scope, the oil industry does not exhibit natural monopoly characteristics nor does it display economic features that would warrant government regulation. The paper also analyzes the economic theories underlying these reforms: why is regulation necessary, what are the different forms of regulation, and how can these policy reforms bring about competition? It also identifies the emerging issues and problems associated with the regulatory reforms. Given our little experience in the effective use of public regulation in a market-driven setting, research is needed to provide a deeper understanding of these issues within the context of our economic, institutional, and political structure. This is necessary in order to come up with possible approaches to overcome our weaknesses and shore up weak administrative and enforcement capacities.electricity and power, economic regulation, regulatory reform, downstream oil

Regulatory Policies and Reforms in the Power and Downstream Oil Industries

This paper looks at the regulatory reforms in the electricity and downstream oil industries, two important inputs to the production process that were heavily regulated by the government. While electricity has strong externalities as well as economies of scale and scope, the oil industry does not exhibit natural monopoly characteristics nor does it display economic features that would warrant government regulation. The paper also analyzes the economic theories underlying these reforms: why is regulation necessary, what are the different forms of regulation, and how can these policy reforms bring about competition? It also identifies the emerging issues and problems associated with the regulatory reforms. Given our little experience in the effective use of public regulation in a market-driven setting, research is needed to provide a deeper understanding of these issues within the context of our economic, institutional, and political structure. This is necessary in order to come up with possible approaches to overcome our weaknesses and shore up weak administrative and enforcement capacities.electricity and power, economic regulation, regulatory reform, downstream oil

Climate policies for road transport revisited (I): Evaluation of the current framework

The global rise of greenhouse gas (GHG) emissions and its potentially devastating consequences require a comprehensive regulatory framework for reducing emissions, including those from the transport sector. Alternative fuels and technologies have been promoted as means for reducing the carbon intensity of the transport sector. However, the overall transport policy framework in major world economies is geared towards the use of conventional fossil fuels. This paper evaluates the effectiveness and efficiency of current climate policies for road transport that (1) target fuel producers and/or car manufacturers, and (2) influence use of alternative fuels and technologies. With diversifying fuel supply chains, carbon intensity of fuels and energy efficiency of vehicles cannot be regulated by a single instrument. We demonstrate that vehicles are best regulated across all fuels in terms of energy per distance. We conclude that price-based policies and a cap on total emissions are essential for alleviating rebound effects and perverse incentives of fuel efficiency standards and low carbon fuel standards. In tandem with existing policy tools, cap and price signal policies incentivize all emissions reduction options. Design and effects of cap and trade in the transport sector are investigated in the companion article (Flachsland et al., 2010).Fuel efficiency standards, low carbon fuel standards, climate change