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A Hotelling Model for Fixed-Cost Driven Power Generation

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  • Andreas A. Renz

    ()

  • Christoph Weber

    ()
    (Chair for Management Sciences and Energy Economics, University of Duisburg-Essen)

Abstract

This paper links Hotelling's theory, in recent literature applied to an emission constrained environment, with the classical capacity planning framework to describe portfolio timeâ€paths in electricity production. Emission targets are considered by a ceiling on the stock of pollution. We propose conditions for an efficient production portfolio as a subset of available technologies. We then derive potential production portfolio timeâ€paths for a renewable, a fossil and a carbon capturing technology that differ according to their fixed and variable costs, their efficiency and their polluting characteristics. We conclude that the share of the fossil technology will continuously decrease, the scarce resource will be fully exploited. On each constrained path, the stock of pollution will remain at the ceiling for a nonâ€zero time period. Emission targets push down scarcity rents, an option for carbon capturing would decrease societal costs and uphold scarcity rents.

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File URL: http://www.wiwi.uni-due.de/fileadmin/fileupload/BWL-ENERGIE/Arbeitspapiere/RePEc/pdf/wp1206_AHotellingModelForFixed-CostDrivenPowerGeneration.pdf
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Bibliographic Info

Paper provided by University of Duisburg-Essen, Chair for Management Science and Energy Economics in its series EWL Working Papers with number 1206.

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Length: 27 pages
Date of creation: Dec 2012
Date of revision: Jan 2013
Handle: RePEc:dui:wpaper:1206

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Related research

Keywords: Scarce resources; Optimal control theory; Hotelling; Valuation; Nonâ€renewable resource; Pollution target; Climate change; Peakâ€loadâ€pricing;

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  1. Sjak Smulders & Edwin van der Werf, 2008. "Climate policy and the optimal extraction of high- and low-carbon fossil fuels," Canadian Journal of Economics, Canadian Economics Association, vol. 41(4), pages 1421-1444, November.
  2. Olli Tahvonen, 1997. "Fossil Fuels, Stock Externalities, and Backstop Technology," Canadian Journal of Economics, Canadian Economics Association, vol. 30(4), pages 855-74, November.
  3. Steffen, Bjarne & Weber, Christoph, 2013. "Efficient storage capacity in power systems with thermal and renewable generation," Energy Economics, Elsevier, vol. 36(C), pages 556-567.
  4. Sunderkötter, Malte & Weber, Christoph, 2012. "Valuing fuel diversification in power generation capacity planning," Energy Economics, Elsevier, vol. 34(5), pages 1664-1674.
  5. Lafforgue, Gilles & Magné, Bertrand & Moreaux, Michel, 2007. "Energy Substitutions, Climate Change and Carbon Sinks," IDEI Working Papers 427, Institut d'Économie Industrielle (IDEI), Toulouse.
  6. Chakravorty, Ujjayant & Moreaux, Michel & Tidball, Mabel, 2006. "Ordering the Extraction of Polluting Nonrenewable Resources," IDEI Working Papers 415, Institut d'Économie Industrielle (IDEI), Toulouse.
  7. Stiglitz, Joseph E, 1976. "Monopoly and the Rate of Extraction of Exhaustible Resources," American Economic Review, American Economic Association, vol. 66(4), pages 655-61, September.
  8. Özge \.I\c{s}legen & Stefan Reichelstein, 2011. "Carbon Capture by Fossil Fuel Power Plants: An Economic Analysis," Management Science, INFORMS, vol. 57(1), pages 21-39, January.
  9. Ujjayant Chakravorty & Bertrand Magne & Michel Moreaux, 2006. "A Hotelling model with a ceiling on the stock of pollution," Working Papers 25547, Institut National de la Recherche Agronomique, France.
  10. Eisenack, Klaus & Edenhofer, Ottmar & Kalkuhl, Matthias, 2012. "Resource rents: The effects of energy taxes and quantity instruments for climate protection," Energy Policy, Elsevier, vol. 48(C), pages 159-166.
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