Renewables, Allowances Markets, and Capacity Expansion in Energy-Only Markets

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 mo...

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Bibliographic Details
Published in:The Energy journal (Cambridge, Mass.) Mass.), 2019-11, Vol.40 (6), p.41-78
Main Authors: Falbo, Paolo, Pelizzari, Cristian, Taschini, Luca
Format: Article
Language:English
Subjects:
Alternative energy sources
Capacity
Electric power demand
Electric power supply
Electricity
Emissions control
Emissions trading
Energy
Energy industries
Energy industry
Energy minerals
Energy resources
Energy sources
Fossil fuels
Fuel production
Investments
Prices and rates
Renewable energy
Renewable energy sources
Renewable energy technologies
Renewable resources
Setting (Literature)
Technology
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Summary: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.
ISSN:0195-6574
1944-9089
DOI:10.5547/01956574.40.6.pfal