Market power in renewable portfolio standards

Renewable portfolio standard (RPS), which requires a certain percentage of electricity production from renewables, has received considerable attention. One emerging issue is the possibility of strategic behavior in the renewable energy certificate/credit (REC) market, and its spillover effects on th...

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Bibliographic Details
Published in:Energy economics 2013-09, Vol.39, p.187-196
Main Authors: Tanaka, Makoto, Chen, Yihsu
Format: Article
Language:English
Subjects:
Alternative energy sources
Applied sciences
Competition
Dominant firm-competitive fringe
Economic data
Electric energy
Electricity
Electricity generation
Energy
Energy economics
Energy market
Energy prices
Exact sciences and technology
General, economic and professional studies
Market power
Methodology. Modelling
Natural energy
Power generation
Regulation
Renewable energy certificates/credits
Renewable energy sources
Renewable portfolio standards
Studies
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Summary:Renewable portfolio standard (RPS), which requires a certain percentage of electricity production from renewables, has received considerable attention. One emerging issue is the possibility of strategic behavior in the renewable energy certificate/credit (REC) market, and its spillover effects on the electricity market. This paper develops dominant firm-competitive fringe models that account for market power. We show that market power could have significant impacts on the REC and power prices. In particular, when a nonrenewable generator is a dominant firm and a renewable generator is a competitive fringe, the nonrenewable firm has a strong incentive to lower the REC price, even to zero for avoiding REC costs. The zero REC price would negate price impacts in the power market, thereby mitigating market power of the dominant firm. However, this could lead to an underinvestment in renewables in the long run as subsidies received by renewables in form of RECs vanish. Therefore, regulatory agencies need to carefully oversee the market performance to ensure a healthy development of renewable industries under the RPS policies. •We develop dominant firm-competitive fringe models that account for market power.•A dominant nonrenewable firm has an incentive to lower the REC price to avoid the costs.•Regulatory agency needs to oversee the market when implementing RPS policies.
ISSN:0140-9883
1873-6181
DOI:10.1016/j.eneco.2013.05.004