Market power, fuel substitution and infrastructure – A large-scale equilibrium model of global energy markets

• Published in: Energy (Oxford) 2014-10, Vol.75, p.483-500
• Main Authors: Huppmann, Daniel, Egging, Ruud
• Format: Article
• Language: English
• Subjects: Applied sciences; Crude oil, natural gas and petroleum products; Dynamics; Energy; Energy policy; Energy system model; Energy use; Exact sciences and technology; Fuels; Generalized Nash equilibrium (GNE); Infrastructure; Infrastructure investment; Markets; Mathematical models; Mixed complementarity problem (MCP); Nuclear power generation; Petroleum products, gas and fuels. Motor fuels, lubricants and asphalts; Strategic behaviour
• ISSN: 0360-5442
• DOI: 10.1016/j.energy.2014.08.004

Assessing and quantifying the impacts of technological, economic, and policy shifts in the global energy system require large-scale numerical models. We propose a dynamic multi-fuel market equilibrium model that combines endogenous fuel substitution within demand sectors and in power generation, detailed infrastructure capacity constraints and investment, as well as strategic behaviour and market power aspects by suppliers in a unified framework. This model is the first of its kind in which market power is exerted across several fuels. Using a data set based on the IEA (International Energy Agency) World Energy Outlook 2013 (New Policies scenario, time horizon 2010–2050, 30 regions, 10 fuels), we illustrate the functionality of the model in two scenarios: a reduction of shale gas availability in the US relative to current projections leads to an even stronger increase of power generation from natural gas in the European Union relative to the base case; this is due to a shift in global fossil fuel trade. In the second scenario, a tightening of the EU ETS emission cap by 80% in 2050 combined with a stronger biofuel mandate spawns a renaissance of nuclear power after 2030 and a strong electrification of the transportation sector. We observe carbon leakage rates from the unilateral mitigation effort of 60–70%. •We propose a spatially disaggregated dynamic equilibrium model for energy markets.•The model combines fuel substitution, market power and detailed infrastructure constraints.•Market power by suppliers can be exerted “across” multiple fuels or resources.•The model includes seasonality and storage to capture short-term operational constraints.•Investment in production, transportation, transformation and storage infrastructure is endogenous.