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Incentives for cost reduction and cost padding in electricity markets with overlapping “green” regulations

Kevin Currier

Utilities Policy, 2016, vol. 38, issue C, 72-75

Abstract: We examine overlapping regulations in electricity markets. Using an example based on a stylized model of a competitive energy market, we study cost-reduction and cost-padding incentives by “green-energy” producers in an electricity market employing an emissions tax and the simultaneous use of a green quota for the generation portfolio and a fair rate-of-return constraint implemented via a system of feed-in tariffs. We show inter alia that when subsidies are phased out, exploitation of the green technologies full cost-reduction potential is a Nash Equilibrium but emissions will increase. In addition, green-energy producers can engage in collusive cost padding to increase profits even as they satisfy the policymaker's desired green quota.

Keywords: Renewable energy; Feed-in-tariff; Cost padding; Incentives; Nash equilibrium (search for similar items in EconPapers)
JEL-codes: H23 Q48 Q58 (search for similar items in EconPapers)
Date: 2016
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DOI: 10.1016/j.jup.2015.10.004

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