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Are targets for renewable portfolio standards too low? The impact of market structure on energy policy

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  • Siddiqui, Afzal S.
  • Tanaka, Makoto
  • Chen, Yihsu

Abstract

In order to limit climate change from greenhouse gas emissions, governments have introduced renewable portfolio standards (RPS) to incentivise renewable energy production. While the response of industry to exogenous RPS targets has been addressed in the literature, setting RPS targets from a policymaker’s perspective has remained an open question. Using a bi-level model, we prove that the optimal RPS target for a perfectly competitive electricity industry is higher than that for a benchmark centrally planned one. Allowing for market power by the non-renewable energy sector within a deregulated industry lowers the RPS target vis-à-vis perfect competition. Moreover, to our surprise, social welfare under perfect competition with RPS is lower than that when the non-renewable energy sector exercises market power. In effect, by subsidising renewable energy and taxing the non-renewable sector, RPS represents an economic distortion that over-compensates damage from emissions. Thus, perfect competition with RPS results in “too much” renewable energy output, whereas the market power of the non-renewable energy sector mitigates this distortion, albeit at the cost of lower consumer surplus and higher emissions. Hence, ignoring the interaction between RPS requirements and the market structure could lead to sub-optimal RPS targets and substantial welfare losses.

Suggested Citation

  • Siddiqui, Afzal S. & Tanaka, Makoto & Chen, Yihsu, 2016. "Are targets for renewable portfolio standards too low? The impact of market structure on energy policy," European Journal of Operational Research, Elsevier, vol. 250(1), pages 328-341.
  • Handle: RePEc:eee:ejores:v:250:y:2016:i:1:p:328-341
    DOI: 10.1016/j.ejor.2015.10.063
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Munoz, Francisco D. & Pumarino, Bruno J. & Salas, Ignacio A., 2017. "Aiming low and achieving it: A long-term analysis of a renewable policy in Chile," Energy Economics, Elsevier, vol. 65(C), pages 304-314.
    2. Cayir Ervural, Beyzanur & Zaim, Selim & Delen, Dursun, 2018. "A two-stage analytical approach to assess sustainable energy efficiency," Energy, Elsevier, vol. 164(C), pages 822-836.
    3. Tsao, Yu-Chung & Vu, Thuy-Linh, 2019. "Power supply chain network design problem for smart grid considering differential pricing and buy-back policies," Energy Economics, Elsevier, vol. 81(C), pages 493-502.
    4. Gutiérrez, E. & Llorca, N. & Sánchez-Soriano, J. & Mosquera, M., 2018. "Sustainable allocation of greenhouse gas emission permits for firms with Leontief technologies," European Journal of Operational Research, Elsevier, vol. 269(1), pages 5-15.
    5. Siddiqui, Afzal S. & Tanaka, Makoto & Chen, Yihsu, 2019. "Sustainable transmission planning in imperfectly competitive electricity industries: Balancing economic and environmental outcomes," European Journal of Operational Research, Elsevier, vol. 275(1), pages 208-223.
    6. Afzal S. SIDDIQUI & TANAKA Makoto & Yihsu CHEN, 2017. "Sustainable Transmission Planning in Imperfectly Competitive Electricity Industries: Balancing economic efficiency and environmental outcomes," Discussion papers 17024, Research Institute of Economy, Trade and Industry (RIETI).
    7. Debia, Sébastien & Pineau, Pierre-Olivier & Siddiqui, Afzal S., 2019. "Strategic use of storage: The impact of carbon policy, resource availability, and technology efficiency on a renewable-thermal power system," Energy Economics, Elsevier, vol. 80(C), pages 100-122.
    8. Ji, Ling & Huang, Guo-He & Xie, Yu-Lei & Niu, Dong-Xiao & Song, Yi-Hang, 2017. "Explicit cost-risk tradeoff for renewable portfolio standard constrained regional power system expansion: A case study of Guangdong Province, China," Energy, Elsevier, vol. 131(C), pages 125-136.
    9. Rintamäki, Tuomas & Siddiqui, Afzal S. & Salo, Ahti, 2016. "How much is enough? Optimal support payments in a renewable-rich power system," Energy, Elsevier, vol. 117(P1), pages 300-313.
    10. Ritzenhofen, Ingmar & Birge, John R. & Spinler, Stefan, 2016. "The structural impact of renewable portfolio standards and feed-in tariffs on electricity markets," European Journal of Operational Research, Elsevier, vol. 255(1), pages 224-242.
    11. Zhang, M.M. & Zhou, P. & Zhou, D.Q., 2016. "A real options model for renewable energy investment with application to solar photovoltaic power generation in China," Energy Economics, Elsevier, vol. 59(C), pages 213-226.

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