Supply chain reliability and the role of individual suppliers

We study a one-period supply chain problem consisting of numerous suppliers delivering a homogenous good. Individual supply is uncertain and may exhibit dependencies with other suppliers as well as with the stochastic demand. Assuming that reliability of supply represents an economic value for the customer that shall be paid accordingly, we first derive an analytical solution for the contribution of an individual supplier to supply chain reliability. Second, applying concepts from cooperative game-theory, we propose a payoff scheme based on marginal contributions that explicitly accounts for the statistical properties of the problem. A number of desirable properties is thus achieved, including static efficiency as well as efficient investment incentives. Lastly, in order to demonstrate the relevance and applicability of the concepts developed, we consider the example of payoffs for reliability in power systems that are increasingly penetrated by interdependent variable renewable energies. We investigate empirical data on wind power in Germany, thereby confirming our analytical findings. In practice, our approach could be applied to design and organize supply chains and their reliability more efficiently. For instance, in the field of power systems, the approach could improve designs of capacity or renewable support mechanisms

Spatial dependencies of wind power and interrelations with spot price dynamics

Wind power has seen strong growth over the last decade and increasingly affects electricity spot prices. Generation from wind energy is stochastic, and if there is lot of wind, prices tend to be lower. Therefore, for an investor, but also for the whole electricity system, it is important to assess the value of wind power at different locations. In this paper, we develop a stochastic simulation model that captures the full spatial dependence structure of wind power by using copulas, incorporated into a structural supply and demand based model for the electricity spot price. This model is calibrated with German data. We find that the specific location of a turbine - i.e., its spatial dependence with respect to the aggregated wind power in the system - is of high relevance for its value. Many of the locations analyzed show an upper tail dependence that adversely impacts the market value. Therefore, a model that assumes a linear dependence structure would systematically overestimate the market value of wind power in many cases. This effect becomes more important for increasing levels of wind power penetration and may render the large-scale integration into markets more difficult

Regulation of non-marketed outputs and substitutable inputs

We study the regulation of a monopolistic firm that provides a non-marketed output based on multiple substitutable inputs. The regulator is able to observe the effectiveness of the provision, but faces information asymmetries with respect to the efficiency of the firm's activities. Motivated by the example of electricity transmission services, we consider a setting where one input (grid expansion) and the output (uninterrupted electricity transmission) are observable, while another input (sophisticated grid operation) and related costs are not. Multi-dimensional information asymmetries are introduced by discrete distributions for the functional form of the marginal rate of substitution between the inputs as well as for the input costs. For this novel setting, we investigate the theoretically optimal Bayesian regulation mechanism. We find that the first best solution cannot be obtained in case of shadow costs of public funding. The second best solution implies separation of the most efficient type with first best input levels, and upwards distorted (potentially bunched) observable input levels for all other types. Moreover, we compare these results to a simpler non-Bayesian approach and hence, bridge the gap between the academic discussion and regulatory practice. We provide evidence that under certain conditions, a single contract non-Bayesian regulation can indeed get close to the second best of the Bayesian menu of contracts regulation

Essays on the economics and regulatory design of power systems

Regulation has always been at the core of power systems. Two of the most important reasons for regulatory interventions to be present in today's power systems are negative environmental externalities from power generation, and the fact that the power grid is a natural monopoly. Against this background, this thesis investigates several aspects of the economics and regulatory design of power systems with a focus on the generation and transmission sector. Specifically, it investigates design alternatives for the organization of the different economic activities in these sectors with the goal to induce short- and long-term efficiency. Novel approaches are suggested to identify and tackle economic and regulatory deficits. The specific challenges that are addressed stem from the time-varying and interdependent temporal and spatial distribution of production (especially, from variable renewable energies) and demand, as well as from the degree and exchange of information between different players in the supply chain for electric power. It is shown in the thesis that weak designs in these fields may entail significant losses of social welfare. Moreover, it provides insights and suggestions regarding the efficient handling of those challenges

The economic inefficiency of grid parity: The case of German photovoltaics

Since PV grid paraity has already been achieved in Germany, households are given an indirect financial incentive to invest in PV and battery storage capacities. This paper analyzes the economic consequences of the household's optimization behavior induced by the indirect financial incentive for in-house PV electricity consumption by combining a household optimization model with an electricity system optimization model. Up to 2050, we find that households save 10% - 18% of their accumulated electricity costs by covering 38 - 57% of their annual electricity demand with self-produced PV electricity. Overall, cost savings on the household level amount to more than 47 bn 2011 up to 2050. However, while the consumption of self-produced electricity is beneficial from the single household's perspective, it is inefficient from the total system perspective. The single household optimization behavior is found to cause excess costs of 116 bn 2011 accumulated until 2050. Moreover, it leads to significant redistributional effects by raising the financial burden for (residual) electricity consumers by more than 35 bn 2011 up to 2050. In addition, it yields massive revenue losses on the side of the public sector and network operators of more than 77 and 69 bn 2011 by 2050 respectively. In order to enhance the overall economic efficiency, we argue that the financial incentive for in-house PV electricity consumption should be abolished and that energy-related network tariffs should be replaced by tariffs which reflect the costs of grid connection

Congestion management in power systems: Long-term modeling framework and large-scale application

In liberalized power systems, generation and transmission services are unbundled, but remain tightly interlinked. Congestion management in the transmission network is of crucial importance for the efficiency of these inter-linkages. Different regulatory designs have been suggested, analyzed and followed, such as uniform zonal pricing with redispatch or nodal pricing. However, the literature has either focused on the short-term efficiency of congestion management or specific issues of timing investments. In contrast, this paper presents a generalized and flexible economic modeling framework based on a decomposed inter-temporal equilibrium model including generation, transmission, as well as their inter-linkages. Short and long-term effects of different congestion management designs can hence be analyzed. Specifically, we are able to identify and isolate implicit frictions and sources of inefficiencies in the different regulatory designs, and to provide a comparative analysis including a benchmark against a first-best welfare-optimal result. To demonstrate the applicability of our framework, we calibrate and numerically solve our model for a detailed representation of the Central Western European (CWE) region, consisting of 70 nodes and 174 power lines. Analyzing six different congestion management designs until 2030, we show that compared to the first-best benchmark, i.e., nodal pricing, inefficiencies of up to 4.6% arise. Inefficiencies are mainly driven by the approach of determining cross-border capacities as well as the coordination of transmission system operators' activities

Decarbonizing Europe’s power sector by 2050 - Analyzing the implications of alternative decarbonization pathways

In this paper, the implications of alternative decarbonization pathways for Europe's power sector up until the year 2050 are analyzed. In speci fic, an electricity system optimization model is used to investigate the minimal costs of decarbonization under a stand-alone CO2 reduction target and to quantify the excess costs associated with renewable energy targets and politically implemented restrictions on alternative lowcarbon technologies, such as nuclear power. Our numerical simulations con firm the theoretical argumentation concerning counterproductive overlapping regulation. The decarbonization of Europe's power sector is found to be achieved at minimal costs under a stand-alone CO2 reduction target (171 bn €2010). Additionally implemented RES-E targets lead to signi cant excess costs of at least 237 bn €2010. Excess costs of a complete nuclear phase-out in Europe by 2050 are of the same order of magnitude (274 bn €2010)

The relevance of grid expansion under zonal markets

The European electricity market design is based on zonal markets with uniform prices. Locational price signals within these zones - necessary to ensure long-term efficiency - are not provided. Specifically, if intra-zonal congestion occurs due to missing grid expansion, the market design is revealed as inherently incomplete. This might lead to severe, unwanted distortions of the electricity market, both in the short- and in the long-term.In this paper, we study these distortions with a specific focus on the impact of restricted grid expansion under zonal markets. For this,we use a long term fundamental dispatch and investment model of the European electricity system and gradually restrict the allowed expansion of the transmission grid per decade. We find that the combination of an incomplete market design and restricted grid expansion leads to a misallocation of generation capacities and the inability to transport electricity to where it is needed. Consequences are severe and lead to load curtail ment of up to 2-3%.Moreover, missing grid expansion makes it difficult and costly to reach envisaged energy targets in the power sector. Hence, we argue that in the likely event of restricted grid expansion, either administrative measures or - presumably more efficient - an adaptation of the current market design to include locational signals will become necessary

The role of grid extensions in a cost-efficient transformation of the European electricity system until 2050

As an attempt to fi ght global warming, many countries try to reduce CO2 emissions in the power sector by significantly increasing the proportion of renewable energies (RES-E). A highly intermeshed electricity transmission grid allows the achievement of this target cost-efficiently by enabling the usage of most favorable RES-E sites and by facilitating the integration of fluctuating RES-E infeed and regional electricity demands. However, construction of new lines is often proceeding very slowly in areas with a high population density. In this paper, we try to quantify the bene ts of optimal transmission grid extensions for Europe until 2050 compared to moderate extensions when ambitious RES-E and CO2 reduction targets are achieved. We iterate a large-scale dynamic investment and dispatch optimization model for Europe with a load-flow based transmission grid model, in order to determine the optimal deployment of electricity generation technologies and transmission grid extensions from a system integrated point of view. Main findings of our analysis include that large transmission grid extensions are needed to achieve the European targets cost-efficiently. When the electricity network is cost-optimally extended, 228,000 km are built until 2050, representing an increase of 76% compared to today. Further findings include substantial increases of average system costs for electricity until 2050, even if RES-E are deployed efficiently throughout Europe, the grid is extended optimally, and if signi cant cost reductions of RES-E are assumed

Cost-Optimal Power System Extension under Flow-Based Market Coupling

Electricity market models, implemented as dynamic programming problems, have been applied widely to identify possible pathways towards a cost-optimal and low carbon electricity system. However, the joint optimization of generation and transmission remains challenging, mainly due to the fact that different characteristics and rules apply to commercial and physical exchanges of electricity in meshed networks. This paper presents a methodology that allows to optimize power generation and transmission infrastructures jointly through an iterative approach based on power transfer distribution factors (PTDFs). As PTDFs are linear representations of the physical load flow equations, they can be implemented in a linear programming environment suitable for large scale problems. The algorithm iteratively updates PTDFs when grid infrastructures are modified due to cost-optimal extension and thus yields an optimal solution with a consistent representation of physical load flows. The method is first demonstrated on a simplified three-node model where it is found to be robust and convergent. It is then applied to the European power system in order to find its cost-optimal development under the prescription of strongly decreasing CO2 emissions until 2050