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Energy efficiency and renewables policies: Promoting efficiency or facilitating monopsony?

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  • Brennan, Timothy J.
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    Abstract

    The cliché in the electricity sector, the "cheapest power plant is the one we don't build," neglects the benefits of the energy that plant would generate. That economy-wide perspective need not apply in considering benefits to only consumers if not building that plant was the exercise of monopsony power. A regulator maximizing consumer welfare may need to avoid rationing demand at monopsony prices. Subsidizing energy efficiency to reduce electricity demand at the margin can solve that problem, if energy efficiency and electricity use are substitutes. Renewable energy subsidies, percentage use standards, or feed in tariffs may also serve monopsony as well with sufficient inelasticity in fossil fuel electricity supply. We may not observe these effects if the regulator can set price as well as quantity, lacks buyer-side market power, or is legally precluded from denying generators a reasonable return on capital. Nevertheless, the possibility of monopsony remains significant in light of the debate as to whether antitrust enforcement should maximize consumer welfare or total welfare.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0301421510007366
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    Bibliographic Info

    Article provided by Elsevier in its journal Energy Policy.

    Volume (Year): 39 (2011)
    Issue (Month): 7 (July)
    Pages: 3954-3965

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    Handle: RePEc:eee:enepol:v:39:y:2011:i:7:p:3954-3965

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    Web page: http://www.elsevier.com/locate/enpol

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    Keywords: Energy efficiency Renewable energy Monopsony;

    References

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    1. M. L. Weitzman, 1973. "Prices vs. Quantities," Working papers 106, Massachusetts Institute of Technology (MIT), Department of Economics.
    2. Russell Pittman, 2007. "Consumer Surplus as the Appropriate Standard for Antitrust Enforcement," EAG Discussions Papers 200709, Department of Justice, Antitrust Division.
    3. Carolyn Fischer, 2010. "Renewable Portfolio Standards: When Do They Lower Energy Prices?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 101-120.
    4. Peltzman, Sam, 1976. "Toward a More General Theory of Regulation," Journal of Law and Economics, University of Chicago Press, vol. 19(2), pages 211-40, August.
    5. Brennan, Timothy J., 2010. "Optimal energy efficiency policies and regulatory demand-side management tests: How well do they match?," Energy Policy, Elsevier, vol. 38(8), pages 3874-3885, August.
    6. Becker, Gary S, 1983. "A Theory of Competition among Pressure Groups for Political Influence," The Quarterly Journal of Economics, MIT Press, vol. 98(3), pages 371-400, August.
    7. George J. Stigler, 1971. "The Theory of Economic Regulation," Bell Journal of Economics, The RAND Corporation, vol. 2(1), pages 3-21, Spring.
    8. Dennis W. Carlton, 2007. "Does Antitrust Need to be Modernized?," Journal of Economic Perspectives, American Economic Association, vol. 21(3), pages 155-176, Summer.
    9. Kenneth Heyer, 2006. "Welfare Standards and Merger Analysis: Why not the Best?," EAG Discussions Papers 200608, Department of Justice, Antitrust Division.
    10. Richard J. Gilbert & David M. Newbery, 1994. "The Dynamic Efficiency of Regulatory Constitutions," RAND Journal of Economics, The RAND Corporation, vol. 25(4), pages 538-554, Winter.
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    Cited by:
    1. Brennan, Timothy J. & Palmer, Karen L., 2013. "Energy efficiency resource standards: Economics and policy," Utilities Policy, Elsevier, vol. 25(C), pages 58-68.
    2. Brennan, Timothy J., 2011. "Energy Efficiency Policy: Surveying the Puzzles," Discussion Papers dp-11-27, Resources For the Future.

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