Renewables, allowances markets, and capacity expansion in energy-only markets

Paolo Falbo, Cristian Pelizzari and Luca Taschini

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We investigate the combined effect of an Emissions Trading System (ETS) and renewable energy sources on investments in electricity capacity in energy-only markets. We study the long-term capacity expansion decision in fossil fuel and renewable technologies when electricity demand is uncertain. We model a relevant tradeoff: a higher share of renewable production can be priced at the higher marginal cost of fossil fuel production, yet the likelihood of achieving higher profits is reduced because more electricity demand is met by cheaper renewable production. We illustrate our theoretical results comparing the optimal solutions under a business- as-usual scenario and under an ETS scenario. This illustration shows under which limiting market settings a monopolist prefers to withhold investments in renewable energy sources, highlighting the potential distortionary effect introduced via an ETS. Our conclusions remain unaltered under varying key modelling assumptions.

Keywords: Emissions Trading System; energy-mix; pass-Through; electricity Markets; electricity Sector (search for similar items in EconPapers)
JEL-codes: J01 L81 R14 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2019-11
New Economics Papers: this item is included in nep-ene, nep-env, nep-ore and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published in Energy Journal, November, 2019, 40(6), pp. 41-78. ISSN: 0195-6574

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http://eprints.lse.ac.uk/101704/ Open access version. (application/pdf)

Related works:
Journal Article: Renewables, Allowances Markets, and Capacity Expansion in Energy-Only Markets (2019)
Working Paper: Renewables, allowances markets, and capacity expansion in energy-only markets (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:101704

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