Production decision analysis of China's fossil fuel power enterprises in dual market conditions

Abstract

At present, China and some other countries and regions are adopting both electricity and carbon trading markets to optimize the resource allocation of the power industry. The aim of this research is to explain the production behaviors of fossil fuel power enterprises in these complex dual market conditions and then evaluate the market effects. On the basis of the real market rules of China and the production characteristics of these enterprises, we describe the production decision process of enterprises with different market positions (leader, follower, and taker), obtain their optimal yield, and then offer market equilibrium results (total electricity supply, clearing price, total CO2 emissions, and carbon intensity level). Besides, we evaluate the impacts of government interventions (market condition changes) on regional market equilibrium situations by numerical simulation. Our results indicate that the direction (positive or negative) of the above impacts is determined by the level of the allocation coefficients of the carbon emission quota, and the degree of these impacts is determined by the level of fine for unit excess carbon emissions. Moreover, our research also proves that enterprise collusion behaviors aggravate market failure but lower the carbon intensity level.