Electricity

Electricity Investment in Liberalised Markets

The study looks at the dynamics of investment in power generation in liberalised electricity markets. It surveys the theoretical arguments and practical experience to date, with the aim of drawing out key messages, in particular in relation to the impact on the environment and on the expansion of the electricity system in developing countries.

Research contact Malcolm Keay

The Fuel Choice and Technological Change Effects of the Tradable Sulfur Permit Scheme on the US Electricity Generating Industry

This paper uses monthly firm-level data to characterize fuel choice and technical change in the United States electricity generating industry in response to the market-based tradable sulfur allowance program. This program was instituted in 1995 by the Clean Air Act Amendments of 1990 and provides the first and longest-running example of the successful implementation of a cap-and-trade allowance scheme. Here, we use data covering the years 1990-2004 in a flexible translog cost function to determine the Allen-Uzawa and Morishima elasticities of substitution for the three main fossil fuel inputs (coal, oil and natural gas) and the rate and direction of technical change. Given the length of time required for the design and construction of a new power plant, it is assumed that capital is fixed, allowing us to use a short run variable cost function and the associated variable cost shares attained through Shephard’s Lemma. Because the sulfur content of the three fossil fuel inputs differ by type, and because some firms are better equipped to accommodate this (i.e. some have installed scrubbers, some operate dual-fired boilers, etc.), the allowance price differentially effects the relative price of the fuels. Here, the effects of emissions policy are followed through to input demand accounting for these relative price differences and firm-specific technologies. The results allow for the assessment of potential future environmental policy, and the methodology is applicable to other tradable emissions allowance scenarios.

Research contact Lindsay Tuthill

Electric Utilities’ Cost Efficiency and Tradable SO2 Permits: The Case of the US Clean Air Act Amendments 1990

This paper analyzes the cost efficiency effects of the tradable SO2 permit scheme implemented in the US in 1995 by the Clean Air Act Amendments of 1990. Using a method of stochastic frontier analysis (SFA), the error term of a standard neoclassical cost function is assumed to have two components: one standard stochastic portion representing statistical noise, and a second one-sided portion attributed to cost inefficiency. Thus, I construct a cost frontier representing “best-practice” over the period, and calculate firm- and time-specific relative cost inefficiency as measured by an observation’s distance the cost frontier. The objectives are 1) to analyze the impact of the SO2 permit price and other firm characteristics on cost inefficiency and 2) to inform the debate about the imposition of private costs upon firms under environmental regulation.

Research contact Lindsay Tuthill

Investment Under Uncertain Emissions Policy for Electricity Generating Firms

Given the relationship between fossil fuel combustion and gaseous and particulate emissions, much attention has been focused on environmental policy for the electricity generating industry. Because of the tradeoff between emissions regulation and electricity generation objectives, however, the establishment of environmental policy is not a simple matter and is often wrought with issues of credibility and uncertainty. This paper seeks to model the effects of such policy uncertainty on the irreversible capacity investment decisions (timing and plant-type) of electricity generating firms through real options analysis. Research thus far shows theoretically that uncertain environmental policy leads to a delay and reduction in “clean” generating options. Lindsay Tuthill will be continuing this project as part of her ongoing DPhil research and will be supervised by Malcolm Keay.

Research contact Lindsay Tuthill

Environmental costs of restructuring the electricity sector in Mexico

The aim of this research is to simulate if the policy change “electricity reform”, which implies changes in ownership and competition, would affect the costs of externalities in Mexico. Electricity reform is defined in two ways. First is as a radical liberalization. The second is more realistic: to allow competition in the fossil fuel generation market, but keeping hydro and nuclear generation capacity in public hands. Externalities are defined as the unwanted emission of gases produced while electricity is generated. Two effects are analyzed. First is if the expected improvement in electricity firms’ productivity and efficiency leads to a higher level of emissions. Second is if liberalization changes current technology mix towards a more/less polluting mix. A computable general equilibrium model is used to simulate these effects.

This project is part of Mr Fuentes' on-going PhD research.

Research contact: Rolando Fuentes

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