Renewables, allowances markets, and capacity expansion in energy-only markets

Paolo Falbo, Cristian Pelizzari, Luca Taschini

Research output: Contribution to journalArticlepeer-review

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 trade off: 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.
Original languageEnglish
Pages (from-to)41-78
Number of pages38
JournalEnergy Journal
Volume40
Issue number6
DOIs
Publication statusPublished - 2019

Keywords

  • emissions trading system
  • energy-mix
  • pass-through
  • electricity markets
  • electricity sector

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