Abstract
This paper evaluates how the effect of introducing a carbon emission tax and/or feed-in tariffs on capacity expansion decisions of generating companies varies depending on the number and size of competing firms and technical conditions of the network. To do so, it uses a Nash–Cournot model of the electricity market. This model is then applied to the IEEE 6-bus network. We study three cases: one with only a carbon tax consistent with current carbon prices; one with only a feed-in tariff consistent with current US levels, and one with simultaneous carbon taxation and feed-in tariff. We show that, at least in our case, the quantity of renewable capacity expansion and the electricity prices depend more significantly on the technical conditions of the network and the number of competitors in the market than it depends on the presence of economic penalties or incentives. We also show how interactions between imperfectly competitive markets and physical networks can produce counterintuitive results, such as an increase in consumer prices as a result of a reduction in network congestion. Our results imply that no two countries would experience the same effects from a policy on carbon tax and feed-in tariff if their electricity market does not have similarities in technical and competitive conditions.
Highlights
Over the last decades, the structure of many electricity markets has evolved from a regulated monopoly to a deregulated, competitive market
As the original model does, we will assume a static model in which generating firms simultaneously decide on capacity expansion and generation levels, in an open-loop fashion, while transmission is operated using a congestion pricing scheme, such that the Nash–Cournot market equilibrium can be found by solving a mixed complementarity problem (MCP)
Prices are lower under the 5 generating companies (Gencos) competition, because a higher level of competition reduces oligopolistic mark-ups
Summary
The structure of many electricity markets has evolved from a regulated monopoly to a deregulated, competitive market. In many markets, the number of firms involved in electricity generation remains small despite electricity market deregulation For this reason, competition among electricity generating firms is usually oligopolistic in nature. Because electricity is a homogeneous product which is not distinguishable according to the fuel source used for its generation; without some secondary trading mechanism, there is the tendency for generating companies (gencos) to use the cheapest fuel to maximize profits. This choice often has negative environmental effects (such as carbon emissions) which are often not properly priced or considered by the gencos. In 2012, electricity generation accounted for 12.4 Gigatonnes of CO2 globally [6], making it the largest single contributor to CO2 emissions
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