“Green” producer cost efficiency incentives in electricity oligopolies

Electricity markets around the world are typically operated under a variety of overlapping regulations such as emissions trading by fossil fuel based producers and renewable energy (RE) quotas by so-called “green” producers. RE support schemes, such as feed-in tariffs (FITs) and green certificate systems are temporary support measures, designed to be withdrawn as technical advancements in RE generation and equipment manufacturing etc. lead to lower costs thereby allowing green producers to compete on an equal footing ( “grid parity”) with fossil fuel-based producers. Recent research has demonstrated that RE support schemes can result in perverse cost efficiency incentives facing green producers, such as rent seeking, cost padding and deliberate waste (see Currier, 2016a and Currier, 2016b).

 In this paper, we examine green producer cost efficiency incentives in an electricity oligopoly operated under (i) an emissions trading system and a green quota implemented via a FIT (pre- parity), (ii) emissions trading only (post-parity) and (iii) no regulation. We explore how these various types of regulation, combined or individually, affect green producers cost efficiency incentives. We demonstrate the dependence of grid parity for RE producers on the level of the emissions constraint and show, inter alia,that which producers pad costs and which producers have incentives to raise their rivals’ costs depend on the combination of regulations faced and that these incentives can reverse when grid parity is achieved by RE producers. We also demonstrate that fossil fuel-based producers can benefit from entry of RE producers under some regulatory regimes.

Finally, we propose a method of fully incentivizing full cost efficiency by green producers when the electricity market is operated under both ET and a green quota. The method works by approaching the desired green quota gradually over time as green technologies approach grid parity.

 References

Currier, K. (2016a). “Incentives for cost reduction and cost padding in electricity markets with overlapping “green” regulations.” Utilities Policy 38:72–75.

Currier, K. (2016b). “Cost reduction incentives in electricity markets with overlapping regulations.” Electricity Journal 29:1–6.