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

Abstract

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.

Time-Frequency Spillovers and the Determinants among Fossil Energy, Clean Energy and Metal Markets

“…3 Fossil energy sources, particularly oil and natural gas, have critical effects on clean energy markets. Low oil prices, which are often accompanied by low natural gas prices, make it more difficult to justify clean energy investments simply because the levelized cost of fossil fuel energy is more competitive (Falbo et al, 2019). This study therefore includes iShares U.S. Oil & Gas Exploration & Production exchange traded funds (OGE) in our spillover framework 2.…”

Is the ETS an effective environmental policy? Undesired interaction between energy-mix, fuel-switch and electricity prices

“…The literature has not focused much on this subject. An exception in this sense is the work in Falbo et al (2019), which treats the certificate price endogenously, linking it to the sector wide energy-mix, but that work only considers a two technologies energy-mix problem (conventional vs. renewables).…”

“…The original contribution of our work consists mainly in the nonobvious extension of the model in Falbo et al (2019) from two to three technologies. Indeed, considering (alongside renewables) two polluting technologies requires to model the fuel-switch option and this significantly complicates the mathematical treatment.…”