Market power and electricity market reform in Northeast China

The Northeast region of China has been used as a testing ground for creation of a functioning wholesale electric power market. We describe the ownership structure of the generation assets for those plants participating in the trial operation of the Northeast China Regional Electricity Market and also for the region as a whole and for each of the provinces making up the region. We calculate the 4-firm Concentration Ratio (CR4) and the Hirschman-Herfindahl Index (HHI). In general, we find that the current ownership structure is relatively concentrated. Arguably, this is a troublesome obstacle to instituting some form of competitive bidding in the wholesale power market, and this may be one factor in the poor outcome of the trial operation

Capacity Factor Risk At Nuclear Power Plants

We develop a model of the dynamic structure of capacity factor risk. It incorporates the risk that the capacity factor may vary widely from year-to-year, and also the risk that the reactor may be permanently shutdown prior to the end of its anticipated useful life. We then fit the parameters of the model to the IAEA's PRIS dataset of historical capacity factors on reactors across the globe. The estimated capacity factor risk is greatest in the first year of operation. It then quickly declines over the next couple of years, after which it is approximately constant. Whether risk is constant or increasing in later years depends significantly on the probability of a premature permanent shutdown of the reactor. Because these should be very rare events, the probability is difficult to estimate reliably from the small historical sample of observations. Our base case is parameterized with a conservatively low probability of a premature permanent shutdown which yields the approximately constant variance. Our model, combined with the global historical dataset, also yields relatively low estimates for the expected level of the capacity factor through the life of the plant. Our base case estimate is approximately 74%. Focusing on alternative subsets of the data raises the estimated mean capacity factor marginally, but not significantly, unless the sample chosen is restricted to selected countries over select years. This emphasizes the need for judgment in exploiting the historical data to project future probabilities.Massachusetts Institute of Technology. Center for Energy and Environmental Policy Researc

Electricity Network Tariff Architectures: A Comparison of Four OECD Countries

The study is motivated by the question “what is the optimal tariff design?” While we do not offer an answer to this question, we use the different designs in four select countries to illuminate the issues involved in designing electricity network tariffs. Electricity networks are a resource shared by all network users. A tariff design that is clear to network users and well understood by them can help them make efficient decisions. A design that sets up conflicting or perverse incentives results in economic distortions. We find that there are a variety of choices and trade-offs while designing the electricity network tariffs for any electricity system. The tariff design must not only be influenced by the technical and economic characteristics of the system, but also the secondary policy objectives that policy makers wish to achieve, while allowing network companies to recover the costs of building and maintaining the network.Massachusetts Institute of Technology. Center for Energy and Environmental Policy Research

Update on the Cost of Nuclear Power

We update the cost of nuclear power as calculated in the MIT (2003) Future of Nuclear Power study. Our main focus is on the changing cost of construction of new plants. The MIT (2003) study provided useful data on the cost of then recent builds in Japan and the Republic of Korea. We provide similar data on later builds in Japan and the Republic of Korea as well as a careful analysis of the forecasted costs on some recently proposed plants in the US. Using the updated cost of construction, we calculate a levelized cost of electricity from nuclear power. We also update the cost of electricity from coal- and gas-fired power plants and compare the levelized costs of nuclear, coal and gas. The results show that the cost of constructing a nuclear plant have approximately doubled. The cost of constructing coal-fired plants has also increased, although perhaps just as importantly, the cost of the coal itself spiked dramatically, too. Capital costs are a much smaller fraction of the cost of electricity from gas, so it is the recent spike in the price of natural gas that have contributed to the increased cost of electricity. These results document changing prices leading up to the current economic and financial crisis, and do not incorporate how this crisis may be currently affecting prices.Massachusetts Institute of Technology. Center for Energy and Environmental Policy Research

Stocks & Shocks: A Clarification in the Debate Over Price vs. Quantity Controls for Greenhouse Gases

We construct two simple examples that help to clarify the role of a key assumption in the analysis of price or quantity controls of greenhouse gases in the presence of uncertain costs. Traditionally much has been made of the fact that greenhouse gases are a stock pollutant, and that therefore the marginal benefit curve must be relatively flat. This fact is said to establish the preference of a price control over a quantity control. The stock pollutant argument is considered dispositive, so that the preference for price controls is categorical. We show that this argument can only be true if the uncertainty about cost is a special form: all shocks are transitory. We show that in the case of permanent shocks, the traditional comparison of marginal benefits vs. marginal costs is mis-measured. The choice between quantity and price controls becomes ambiguous again and depends upon a more difficult measurement of marginal costs and benefits. The simplicity of the examples and the solutions is a major element of the contribution here. The examples are readily accessible and the comparison of results under the alternative assumptions of transitory and permanent shocks is stark.Massachusetts Institute of Technology. Center for Energy and Environmental Policy Researc

The Future of Nuclear Power After Fukushima

http://web.mit.edu/ceepr/www/publications/workingpapers.htmlThis paper analyzes the impact of the Fukushima accident on the future of nuclear power around the world. We begin with a discussion of the ‘but for’ baseline and the much discussed ‘nuclear renaissance.’ Our pre-Fukushima benchmark for growth in nuclear generation in the U.S. and other developed countries is much more modest than many bullish forecasts of a big renaissance in new capacity may have suggested. For at least the next decade in developed countries, it is composed primarily of life extensions for many existing reactors, modest uprates of existing reactors as their licenses are extended, and modest levels of new construction. The majority of forecasted new construction is centered in China, Russia and the former states of the FSU, India and South Korea. In analyzing the impact of Fukushima, we break the effect down into two categories: the impact on existing plants, and the impact on the construction of new units. In both cases, we argue that the accident at Fukushima will contribute to a reduction in future trends in the expansion of nuclear energy, but at this time these effects appear to be quite modest at the global level

Nuclear Fuel Recycling - the Value of the Separated Transuranics and the Levelized Cost of Electricity

We analyze the levelized cost of electricity (LCOE) for three different fuel cycles: a Once-Through Cycle, in which the spent fuel is sent for disposal after one use in a reactor, a Twice-Through Cycle, in which the spent fuel is recycled for a second use in a light water reactor after which the spent fuel is sent for disposal, and a Fast Reactor Recycle in which all of the transuranics are repeatedly recycled in fast reactors. We carefully define the LCOE and provide a simple solution method that involves simultaneously calculating the value of the recycled materials, whether plutonium or the transuranics. We parameterize our formulas and calculate the LCOEs. Earlier reports do not provide general formulas and solution methods for calculating the LCOE. We contrast our methodology with the definitions and solution methods employed in various prior reports, and we compare our parameter inputs and resulting LCOEs. For example, we show that the ‘equilibrium cost’ of fast reactor systems as calculated in other studies exaggerates the LCOE. Our calculations show that, based on current estimates of the costs for the various activities, recycling increases the LCOE by between 1.7 and 2.8 mills/kWh. This is an approximately 20-34% increase in the fuel cycle cost of the Once-Through Cycle, which we estimate at 8.28 mill/kWh. This is an approximately 2-4% increase in the total LCOE of the Once-Through Cycle, which we estimate at 75.32 mill/kWh. For the Twice- Through Cycle, the separated plutonium has a negative value, meaning that a reactor will have to be paid to take the recycled plutonium. For the Fast Reactor Cycle, the separated transuranics have a negative value, meaning that a fast reactor will have to be paid to take the transuranics.Massachusetts Institute of Technology. Center for Energy and Environmental Policy Research

Technologies, markets and challenges for development of the Canadian Oil Sands industry

This paper provides an overview of the current status of development of the Canadian oil sands industry, and considers possible paths of further development. We outline the key technology alternatives, critical resource inputs and environmental challenges and strategic options both at the company and government level. We develop a model to calculate the supply cost of bitumen and synthetic crude oil using the key technologies. Using the model we evaluate the sensitivity of the supply costs to the critical model inputs

The Weak Tie Between Natural Gas and Oil Prices

Several recent studies establish that crude oil and natural gas prices are cointegrated, so that changes in the price of oil appear to translate into changes in the price of natural gas. Yet at times in the past, and very powerfully in the last two years, many voices have noted that the two prices series appear to have "decoupled". We explore the apparent contradiction between these two views. Although we also find that the two series are cointegrated, recognition of the statistical fact of cointegration needs to be tempered with two additional points that we think have been insufficiently emphasized in the past literature. First, there is an enormous amount of unexplained volatility in natural gas prices at short horizons. Hence, any simple formulaic relationship between the price of oil and the price of natural gas will leave a large portion of the price of natural gas unexplained. Second, the cointegrating relationship does not appear to be stable through time. Natural gas prices may be tied to oil prices, but the relationship can shift dramatically over time. Therefore, although the two price series are cointegrated, the confidence intervals for both short and long time horizons are large.Massachusetts Institute of Technology. Center for Energy and Environmental Policy Researc

Designing a US Market for CO2

In this paper we focus on one component of the cap-and-trade system: the markets that arise for trading allowances after they have been allocated or auctioned. The efficient functioning of the market is key to the success of cap-and-trade as a system. We review the performance of the EU CO2 market and the US SO2 market and examine how the flexibility afforded by banking and borrowing and the limitations on banking and borrowing have impacted the evolution of price in both markets. While both markets have generally functioned well, certain episodes illustrate the importance of designing the rules to encourage liquidity in the market.Massachusetts Institute of Technology. Center for Energy and Environmental Policy Research