Optimal Regulation of Electricity Provision with Rolling and Systemic Blackouts

Catherine Bobtcheff, Philippe De Donder and François Salanié

No 12092, CESifo Working Paper Series from CESifo

Abstract: We set up a static model of electricity provision in which delivery to consumers is only imperfectly reliable. Blackouts can be either rolling or systemic; in both cases a price cap becomes active on the wholesale market. We show that for any given value of the price cap, one can decentralize optimal allocations thanks to two types of regulatory instruments: a retail tax, and capacity subsidies. Some properties follow. If demand is affected by multiplicative shocks only, capacity subsidies are exactly financed by the revenues from the retail tax. If moreover the distribution of systemic blackouts is exogenous, a price cap is sufficient, provided it is set at the value of lost load. In all other cases, all instruments are needed, and capacity subsidies need to be differentiated, based on the correlation between available capacity and its social value. We also discuss the impacts of a carbon tax on supply, demand, and optimal regulation.

Keywords: electricity; reliability; renewables; climate change (search for similar items in EconPapers)
JEL-codes: D24 Q41 Q42 Q48 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_12092

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