Regulating the development of renewable energy: a model-based analysis of electricity utilities in Europe
Creators: name: Miriello, Caterina
Publisher: name: IMT Alti Studi Lucca
Year: 2011
Subjects: HB Economic Theory

description: The thesis analyses some features of the liberalised electricity markets, from the perspective of its dealing with the development of renewable energy. It does so by following essentially three broad topics. The introduction starts from a short discussion on the debate on renewables currently in place in the EU, focusing on the issue of financing their development through incentives for investors in the sectors. Here I also state the research  questions and the motivation behind this research. The dissertation is composed of three parts. In the first part, I try to put the discussion in its proper frame by analysing in detail the functioning of the electricity markets and the different approaches used by the economic literature to address its modelling. I start by the  essentials, explaining why these markets need to be  regulated, why there are subsidies to support the renewables in the first place, and how can these subsidies be economically justified. Then I classify the different approaches that have been used to model power markets and highlight the most important works. The second part analyses some different market structures to enhance the investment in renewable energies. An agent-based model is utilised that represents a wholesale electricity market, characterised by ten symmetric firms that compete through a uniform auction. The model allows us to monitor the pattern of wholesale prices, profits and, through some indicators, the probability of investment. The simulations aim at analysing the effects of larger share of wind power on wholesale prices and investment in the electricity market. This chapter shows many interesting results, most notably that subsidies to enhance wind energy deployment may not be as essential as it seems after a certain stage. Furthermore, we account for the possibility of firms to act strategically by withholding some of their capacity to  artificially increase prices, and see how the results are affected by this circumstance. In Chapter 4, the discussion is moved towards security of supply, and how it is affected by wind penetration. Since the very beginning of the electricity liberalisation process, one of the key questions posed has been whether the market let on its own would have been able to provide adequate security of supply at the power generation level, or if some additional regulatory mechanism needed to be introduced instead. The risk of underinvestment in generating capacity is particularly severe in the case of peaking plants, i.e. the generating plants that are used in case of an unanticipated peak of demand and that are the instrument par excellence to manage the issue of system reliability. This section discusses the features and the limits of the energy only markets (i.e. a system with the least intervention possible by regulators) and on the mechanisms to coordinate investments in new capacity such as capacity payments.  Then I use again the agent-based model developed in Chapter 3, adapting it for the different purposes of this research. The simulations aim at analysing how an increasing share of wind impacts on the security of supply, and from this the discussion is led on the implication the results have in terms of policy both to increase capacity and to increase  renewable energy. The results show that in times of high demand the peaking price is lower for generators with wind than for generators that do not have wind in their technology portfolio. The conclusions are the following: there is need to coordinate incentives in renewables and incentives in new capacity, because the incentives for renewables basically are incentives in order to build new capacity, and having two types of incentives to get the same outcome is inefficient. I argue that an adequate and differentiated development of energy from renewable sources lessens the need for incentives in building new capacity; existing fossil fuels plants can become peaking units and be replaced as baseload units by the new renewable-energy units.