Measuring the effects of environmental policies on electricity markets risk

• Published in: Energy economics 2021-10, Vol.102, p.105470, Article 105470
• Main Authors: Inzunza, Andrés, Muñoz, Francisco D., Moreno, Rodrigo
• Format: Article
• Language: English
• Subjects: Aversion; Carbon; Carbon tax; CVaR optimization; Electricity; Electricity generation; Electricity generation planning; Energy economics; Environmental policy; Environmental tax; Equilibrium; Fossil fuels; Hydrology; Hydrothermal systems; Incentives; Markets; Policies; Portfolios; Power systems economics; Prices; Renewable portfolio standard; Risk; Risk aversion; Risk exposure; Risk levels; Risk management; Risk reduction; Taxation; Taxes; Uncertainty
• ISSN: 0140-9883; 1873-6181
• DOI: 10.1016/j.eneco.2021.105470

This paper studies how environmental policies, such as renewable portfolio standards (RPS) and carbon taxes, might contribute to reducing risk exposure in the electricity generation sector. We illustrate this effect by first computing long-term market equilibria of the Chilean generation sector for the year 2035 using a risk-averse planning model, considering uncertainty of hydrological scenarios and fossil fuel prices as well as distinct levels of risk aversion, but assuming no environmental policies in place. We then compare these risk-averse equilibria to generation portfolios obtained by imposing several levels of RPS and carbon taxes in a market with risk-neutral firms, separately. Our results show that the implementation of both policies can provide incentives for investments in portfolios of generation technologies that limit the risk exposure of the system, particularly when high levels of RPS (35%) or high carbon taxes (35 $/tonCO2) are applied. However, we find that in the case of a hydrothermal system, the resulting market equilibria under RPS policies yield expected generation cost and risk levels (i.e. standard deviation of costs) that are more similar to the efficient portfolios determined using a risk-averse planning model than the ones we find under the carbon tax. •We study effects of environmental policies on cost/risk in the generation sector.•We compute long-term equilibria in a complete market and use as benchmark.•We compare these with equilibria for risk-neutral firms and environmental policies.•RPS and carbon taxes can limit system risk exposure in a cost-efficient manner.•Under hydro availability and fossil fuel price risks, RPS delivers better outcomes.