Efficiency in Wholesale Electricity Markets: On the Role of Externalities and Subsidies

Sylwia Bialek and Burcin Unel

No 8673, CESifo Working Paper Series from CESifo

Abstract: This paper studies the effects of capacity market reforms that the U.S. grid operators have undertaken in response to state-level subsidies paid to emission-free electricity generation. We first derive an analytical model of energy-and-capacity markets that allows us to predict the price and resource mix effects of subsidies, as well as to understand their welfare implications. We confirm that while the subsidies, even when combined with energy consumption taxes, generally cannot achieve first-best outcomes. We also show there exists a range of subsidy rates that are welfare-enhancing when greenhouse gas externalities are taken into account. Finally, we focus on the evaluation of capacity market reforms similar to those in PJM, ISO-NE, and NYISO, finding that such reforms are likely to decrease welfare.

Keywords: capacity markets; renewables; subsidies; welfare (search for similar items in EconPapers)
JEL-codes: Q28 Q41 Q42 Q58 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-ene and nep-reg
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Journal Article: Efficiency in wholesale electricity markets: On the role of externalities and subsidies (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_8673

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