Abstract
Within the last 25 years, liberalization (deregulation) of electricity markets around the world has been undertaken with the goal of replacing long-standing monopoly rights with fully competitive markets. In addition, many nations have begun employing “tradable green certificate” systems to promote electricity generation from renewable (“green”) energy sources (wind, solar, biomass, hydroelectric, etc.), with the primary objective of mitigation of greenhouse gas emissions from fossil fuel (“black”) producers. In this paper, we examine some welfare implications of the use of green certificate systems in electricity markets under alternative market structures. We demonstrate that under a wide variety of scenarios, an oligopolistic market structure may perform better in terms of welfare than a competitive market structure. We also demonstrate that there will typically be an optimal level of market power summarized by a conjectural variations parameter that depends on the cost structure of both green and black firms. Our model provides insights into the policy challenge of electricity market design and suggests an approach that could be applied in a more general model.
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Notes
In the U.S., TGCs are often referred to as “renewable energy credits” or “renewable energy certificates.”
In the present context output levels should be interpreted as “capacity” (Tamas et al. 2010). It should be noted that short-run marginal cost may be zero in existing wind and hydro systems.
Alternatively, the obligation to hold certificates may be placed on consumers.
In some cases there may be excess supply of TGCs, in which case a third party typically intervenes and purchases the unsold certificates at a “buy-out” price (Amundsen and Mortensen 2001). For simplicity we ignore this possibility and assume the certificate market clears.
As an anonymous referee has pointed out, it is important to note that the primary objective of a TGC system is the stimulation of the penetration of green electricity into the market. In this sense, a TGC system represents a government mandate and does not directly address the issue of market failure from black production. Assuming no additional inefficiencies from the bureaucratic administration of the TGC program, the ORP represents the socially optimal amount of renewable penetration, given consumer preferences and the fact that production costs for black electricity are lower than for green electricity but generate additional costs in the form of environmental damages.
Our choice of cost parameter values is intended to reflect the general fact that renewable electricity is more costly that fossil-fuel electricity (Zhou and Tamas 2010). In our examples, the cost parameter “a” corresponds to “ω” in Proposition 1.
For a regulatory adjustment process capable of determining (x CN (α ∗ CN ), y CN (α ∗ CN )) iteratively, see Currier (2013).
For a discussion of some difficulties associated with the empirical estimation of conjectural variation (i.e., “conduct”) parameters, see Corts (1999).
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Acknowledgments
We would like to thank an anonymous referee for several important suggestions on an earlier version of this paper.
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Currier, K.M., Sun, Y. Market Power and Welfare in Electricity Markets Employing Tradable Green Certificate Systems. Int Adv Econ Res 20, 129–138 (2014). https://doi.org/10.1007/s11294-014-9463-2
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DOI: https://doi.org/10.1007/s11294-014-9463-2