We explore the role of a transmission system operator (TSO) that builds a transmission line to ac... more We explore the role of a transmission system operator (TSO) that builds a transmission line to accommodate renewable energy while attempting to lower emissions. A TSO in a deregulated electricity industry can only indirectly influence outcomes through its choice of the transmission line capacity. Via a bi-level model, we show that this results in less transmission capacity and with limited emissions control in a perfectly competitive industry vis-a-vis a benchmark centrally planned system. Surprisingly, a carbon tax on industry leads to a perfect alignment of incentives and maximized social welfare only under perfect competition. By contrast, a carbon tax actually lowers social welfare under a Cournot oligopoly as the resulting reduction in consumption facilitates the further exercise of market power.
2018 IEEE International Conference on Systems, Man, and Cybernetics (SMC), 2018
The U.S. Clean Power Plan stipulates a statespecific performance-based CO2 emission standard and ... more The U.S. Clean Power Plan stipulates a statespecific performance-based CO2 emission standard and delegates considerable flexibility to the states for using either a tradable performance-based or a mass-based permit program. This paper analyzes these two instruments when they are subject to imperfect competition. We show that while the cross-subsidy inherent in the performance-based instrument might effectively reduce power prices, it could also inflate energy demand, thereby rendering permits scarce. A dominant firm with a relatively clean endowment under the performance-based policy would be able to manipulate the electricity market as well as to lower permit prices, which might worsen market outcomes compared to its mass-based counterpart. On the other hand, the "cross-subsidy" could be the dominant force leading to a higher social welfare if the leader has a relatively dirty endowment.
2018 Asia-Pacific Signal and Information Processing Association Annual Summit and Conference (APSIPA ASC), 2018
Real-time electricity pricing (RTP) for consumers has long been argued to be key to realize the m... more Real-time electricity pricing (RTP) for consumers has long been argued to be key to realize the many envisioned benefits of a smart energy grid. However, there has not been a consensus on how to best implement RTP in an organized, competitive wholesale market with active demand participation. Since most of such markets implement a two-settlement system, with day-ahead electricity price forecasts guiding physical transactions in the next day and real-time ex post prices settling any realtime imbalances, it is a natural idea to let consumers respond to the day-ahead prices. We show in this paper through simulation that naive responsive behaviors to the day-ahead price signals can lead to high price volatility, which will increase not only the risk of system instability, but also the financial risks faced by the consumers. To overcome this issue, we propose a game-theoretic framework in which each consumer solves a multi-armed bandit problem; that is, each consumer learns from the history of the game and attempts to minimize the cumulative regrets. We show through simulation that such a framework leads to drastically reduced volatility on real-time prices and much flatter load curves for the entire grid.
Several existing or proposed climate policies have considered bankable permits in a cap-and-trade... more Several existing or proposed climate policies have considered bankable permits in a cap-and-trade (C&T) program that covers beyond a single sector, e.g., electric power, or allows the program to link to external C&T programs in other regions. This paper develops a model of permit banking under imperfect competition and imperfect inter-temporal arbitrage, in which the firms in one dominant sector can exert market power in both product and permit markets, while those in other sectors or linked programs are perfectly competitive. A simple analytical model is developed to generate contestable hypothesis. We further extend the model to account for the physical power system, institutional rules and market conditions, and then apply it to the Pennsylvania-Jersey-Maryland (PJM) market. We show that if the dominant firm has market power, then the permit price rises at a higher rate than the discount rate, contrary to perfectly competitive permit market, where the permit price rises at the discount rate following the classic Hotelling's rule. Furthermore, under a declining emissions cap system with the permits front-loaded in early time periods, the dominant firm has an incentive to suppress the permit prices (monopsony) when buying the permits in early periods, and then inflate the permit prices (monopoly) when selling them in later periods. Numerical results of the PJM case are consistent with the analytical conclusion.
As part of its climate policy, the European Union (EU) aims to reduce greenhouse gas (GHG) emissi... more As part of its climate policy, the European Union (EU) aims to reduce greenhouse gas (GHG) emissions levels by 20% by the year 2020 compared to 1990 levels. Although the EU is projected to reach this goal, its achievement of objectives under its Emissions Trading System (ETS) may be delayed by carbon leakage, which is defined as a situation in which the reduction in emissions in the ETS region is partially offset by an increase in carbon emissions in the nonETS regions. We study the interaction between emissions and hydropower availability in order to estimate the magnitude of carbon leakage in the SouthEast Europe Regional Electricity Market (SEE-REM) via a bottom-up partial equilibrium framework. We find that 6.3% to 40.5% of the emissions reduction achieved in the ETS part of SEE-REM could be leaked to the nonETS part depending on the price of allowances. Somewhat surprisingly, greater hydropower availability may increase emissions in the ETS part of SEE-REM. However, carbon leakage might be limited by demand response to higher electricity prices in the nonETS area of SEE-REM. Such carbon leakage can affect both the competitiveness of producers in ETS member countries on the periphery of the ETS and the achievement of EU targets for CO 2 emissions reduction. Meanwhile, higher nonETS electricity prices imply that the current policy can have undesirable outcomes for consumers in nonETS countries, while nonETS producers would experience an increase in their profits due to higher power prices as well as
2009 IEEE Power & Energy Society General Meeting, 2009
We discuss potential competitive effects of regulating carbon emissions in a transmission constra... more We discuss potential competitive effects of regulating carbon emissions in a transmission constrained electricity market. We compare two regulatory instruments, renewable portfolio standards and taxing emmissions. We derive general conclusions about impacts on prices and output on a three node network. We find that renewable portfolio standards increase the market power of nonpolluting generators whereas the tax is marketpower neutral. We verify our conclusions through simulations.
Energy Institute at Haas working papers are circulated for discussion and comment purposes. They ... more Energy Institute at Haas working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to review by any editorial board.
The impact and efficacy of a cap-and-trade regulation on the electric power industry depend on in... more The impact and efficacy of a cap-and-trade regulation on the electric power industry depend on interactions of demand elasticity, transmission network, market structure, and strategic behavior of generation firms. This paper develops an equilibrium model of an oligopoly electricity market in conjunction with a Cap-and-Trade emissions permits market to study such interactions. The concept of conjectural variations is proposed to account for imperfect competition in the permits market. We demonstrate the model using a WECC 225-bus system with a detailed representation of the California market. In particular, we examine the extent to which permit trading strategies affect the market outcome. We find that a firm with more efficient technologies can employ strategic withholding of permits, which allows for its increase in output share in the electricity market at the expense of other less efficient firms.
Models based on linear complementarity problem (LCP) formulations have been applied previously to... more Models based on linear complementarity problem (LCP) formulations have been applied previously to assess the potential for exercise of market power in transmission constrained electricity markets. Here, we use that approach to simulate the interaction of pollution permit markets (in particular, the USEPA Ozone Transport Commission (OTC) NO x Budget Program) with electricity markets in the presence of market power. Because: the permits program is regional rather than national in scope and some power producers are relatively large consumers or sellers of permits, there could be significant interactions between market power in the permits and energy markets. In our model, the producers with substantial capacity share exercise Cournot (quantity) strategies in electricity markets, while anticipating that NO x prices will respond to their permits purchase or sales decisions. Each firm's conjectures regarding this price response is modeled as a first-order approximation around the market equilibrium using an exogenous response assumption. The application is to the Pennsylvania-New Jersey-Maryland Interconnection (PJM) (US) market during 2000, which is represented by a 14-node, 18-arc linearized DC load flow model. A total of 730 generators are included in our analysis and five demand periods are considered. The results show that PJM market is relatively competitive during this period, as its prices are closer simulated competitive levels than to Cournot (oligopoly) prices. The NO x market and Cournot energy markets influence each other in several ways. One is that Cournot competition lowers the price of NO x permits, which in turn results in a large, high emissions producer actually expanding its output, contrary to simple Cournot energy-only markets. Further, some Cournot producers could be worse rather than better off under oligopoly than perfect competition. Meanwhile, higher energy prices and lower NO x permit prices provide two reasons for smaller pricetaking producers to expand energy generation. Total NO x emission declines as a consequence of restraining output by Cournot producers. In general, because pollution permits are an important cost and their price is volatile, high concentration in the market for such permits can exacerbate the effects of market power in energy markets.
We develop a framework to study the impact of climate-induced changes on electricity sector. It c... more We develop a framework to study the impact of climate-induced changes on electricity sector. It could affect spatial and temporal distribution of pollution emissions in the long run. Under a worse-case assumption, significant emissions during peak demand hours could occur. It could possibly worsen regional air quality, even if seasonal emissions are constant under cap. A separate cap or tax can be applied to extreme weather conditions to avoidworsening air quality.
We examine the short-run implications of CO 2 trading for power production, prices, emissions, an... more We examine the short-run implications of CO 2 trading for power production, prices, emissions, and generator profits in northwest Europe in 2005. Simulation results from a transmission-constrained oligopoly model are compared with theoretical analyses to quantify price increases and windfall profits earned by generators. The analyses indicate that the rates at which CO 2 costs are passed through to wholesale prices are affected by market competitiveness, merit order changes, and elasticities of demand and supply. Emissions trading results in large windfall profits, much but not all of which is due to free allocation of allowances. Profits also increase for some generators because their generation mix has low emissions, and so they benefit from electricity price increases. Most emission reductions appear to be due to demand response, not generation redispatch.
Climate policy has mostly focused on regulating power suppliers. Suppliers then reduce their gree... more Climate policy has mostly focused on regulating power suppliers. Suppliers then reduce their greenhouse gas emissions through retrofitting pollution control devices, switching fuels, or alternating energy production processes. There is a growing interest to explore regulating emissions from the demand side by incentivizing consumers to reduce their energy consumptions or purchase power from cleaner sources through tracking carbon content of power flow in the transmission network. This paper analyzes the market outcomes under two approaches: producer-based and demand-based carbon tax. In particular, we formulate each approach as a market equilibrium model. For the consumer-based approach, we assume that a utility who procures electricity on behalf of consumers is subject to the carbon tax. For the producer-based approach, the producers will pay for their emissions. We show the two approaches are equivalent when the program's coverage is complete. That is, they produce the same prices, distribution of emissions and the economic rent allocation. However, when the coverage is incomplete, the consumer-based carbon tax is less effective in pricing carbon emissions owing to the fact that sales to unregulated nodes are not subject to the carbon tax. Given that the transaction cost of implementing consumer-based tax is likely to be higher, benefit of tracking power flows in order to estimating carbon content might not be justified even with a full coverage program.
Climate policy has mostly focused on regulating power suppliers. Suppliers then reduce their gree... more Climate policy has mostly focused on regulating power suppliers. Suppliers then reduce their greenhouse gas emissions through retrofitting pollution control devices, switching fuels, or alternating energy production processes. There is a growing interest to explore regulating emissions from the demand side by incentivizing consumers to reduce their energy consumptions or purchase power from cleaner sources through tracking carbon content of power flow in the transmission network. This paper analyzes the market outcomes under two approaches: producer-based and demand-based carbon tax. In particular, we formulate each approach as a market equilibrium model. For the consumer-based approach, we assume that a utility who procures electricity on behalf of consumers is subject to the carbon tax. For the producer-based approach, the producers will pay for their emissions. We show the two approaches are equivalent when the program's coverage is complete. That is, they produce the same prices, distribution of emissions and the economic rent allocation. However, when the coverage is incomplete, the consumer-based carbon tax is less effective in pricing carbon emissions owing to the fact that sales to unregulated nodes are not subject to the carbon tax. Given that the transaction cost of implementing consumer-based tax is likely to be higher, benefit of tracking power flows in order to estimating carbon content might not be justified even with a full coverage program.
Two major historic processes of the last four decades have shaped current electricity markets wor... more Two major historic processes of the last four decades have shaped current electricity markets worldwide. First, the unbundling of vertically integrated utilities resulted in imperfectly competitive electricity markets characterised by oligopolistic ownership structures (Wilson, 2002). Second, concerns about the effect of greenhouse gases (GHGs) on climate change led to carbon pricing through transferable property rights, e.g., allowances or permits. As with any other market, that for carbon allowances can also be subject to the exercise of market power. Kolstad and Wolak (2003)’s empirical study suggests that NOx permits might have been used as a vehicle for producers to exert market power by offering electricity at higher prices in the California market in 2001. Moreover, if a dominant power producer can additionally withhold NOx permits, then it may further increase its profit while driving up the permit price for rivals as demonstrated in a leader-follower case study of the Penns...
This paper examines the effects of emissions allowances allocation schemes on the extent of the G... more This paper examines the effects of emissions allowances allocation schemes on the extent of the GHG (greenhouse gas) leakage and the contract shuffling. Two allocation methods, grandfathering and the output-based method, are considered. Whereas grandfathering separates future allowances allocation from today’s decisions, the output-based approach links the future awarded allowances to today’s output level. The latter effectively subsidizes generators’ production costs, encourages more output and consequently elevates GHG allowances prices in current period. In this paper, we first analyze the effect of output-update allocation on the leakage and shuffling using a stylized duopoly model, which abstracts from details of point-of-regulation. A single-stage computable model, which allows representing source-based, load-based and first-seller-based programs, is then applied to examine the implications. The latter model is equivalent to a two-stage formulation with perfect foresight. Our ...
Models formulated as complementarity problems have been applied previously to assess the potentia... more Models formulated as complementarity problems have been applied previously to assess the potential for market power in transmission-constrained electricity markets. Here, we use the complementarity approach to simulate the interaction of pollution permit markets with electricity markets, considering forward contracts and the operating reserve market. Because some power producers are relatively large consumers of permits, there could be interaction between market power in the permits and energy markets. Market power in the energy market is modeled using a Cournot game, while a conjectured price response model is used in the permits market. An illustrative application is made to Pennsylvania—New Jersey—Maryland Interconnection (PJM), which we represent by a 14-node dc load-flow model, and the USEPA Ozone Transport Commission NO x Budget Program. The results show that forward contracts effectively mitigate market power in PJM energy market and both simulated solutions of perfect and Co...
Partially owing to the political deadlock in Washington DC, US climate policy, historically, has ... more Partially owing to the political deadlock in Washington DC, US climate policy, historically, has been driven mainly by state or regional effort, such as the Regional Greenhouse Gas Initiative in the northeast United States and California AB 32. One major change recently is the introduction of the Clean Power Plan (CPP). CPP is a new federal-level policy introduced by the US Environmental Protection Agency to cut CO 2 emissions from existing fossil-fuel power plants by 30% below 2005 levels by 2030. While the proposal establishes a state-specific target with various "building blocks" that lay out possible reduction strategies, it leaves states and the power sector with considerable flexibility as for how to achieve their goals. More specifically, a state can decide to adopt either 1) a default "rate-based" standard where tons of CO 2 emissions per megawatt hour of electricity generated is measured, or 2) an equivalent "mass-based" standard, such as in a cap-and-trade (C&T) regime based on their projection of GDP growth. Economic theory suggests that the two approaches would provide incentives that might alter a firm's production decisions in a very different way (Bushnell et al, 2014). Furthermore, whereas the regulatory body at the state level as well as industry might value the "flexibility" to a great extent, the fact that the territory of a regional power/electric market, such as PJM (Pennsylvania-Jersey-Maryland) or NEISO (New England Independent System Operator), typically goes beyond the state boundary and encompasses a number of states makes it challenging to evaluate the effectiveness of the policy. One emerging issue that has received little attention is the possibility of strategic behavior in rate-or performancebased standards as well as its repercussions or spillovers to the product market. The consequences of market power can include price distortions, production inefficiencies, and a redistribution of income from consumers to suppliers. In fact, the distribution of economic rent or welfare analysis needs further attention when comparing performace-to mass-based policies. In particular, while the government collects all the proceedings when tradable permits are auctioned off in initial allocations, the rate-based policy is inherently revenue neutral. This is mainly because, similar to a renewable portfolio standard, the extent to which a generator needs to pay when complying with the policy depends on its emission rate relative to the performance standard. In the case where its emission rate is greater than the performance standard, it will need to pay an emission cost to cover its emissions, effectively elevating its marginal cost of production. On the other hand, when a generator's emission rate is less than the performance standard, the negative cost becomes a subsidy that effectively lowers its production cost, thereby making the generator more competitive. Thus, it is unclear if one policy will outputform the other one on ecoconomic grounds, especially when concerning distributional effects.
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Papers by Yihsu Chen