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Distributed Generation versus Centralised Supply: a Social Cost-Benefit Analysis

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  • Gullì, F.
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    This paper attempts to verify whether we are moving towards a new paradigm of the network energy industry (electricity and natural gas), based on a wide decentralisation of the energy supply. We do this by comparing the social benefits of decentralised and centralised models, simulating “ideal” situations in which any source of allocative inefficiencies is eliminated. This comparison focuses on assessing internal and external benefits. The internal benefits are calculated by simulating the optimal prices of the electricity and gas inputs. The external benefits are estimated by applying the “ExternE” methodology, one of the most recent and accurate approaches in this field. The paper rejects the hypothesis that we are moving towards a new paradigm and points out how the considerable interest in the deployment of distributed generation (DG) is probably due to market distortions, in some cases, enforced by market reforms. In this respect, the paper reflects upon the real effectiveness of such reforms as well as the overall efficiency of the environmental policies focusing on the reduction of green-house gas emissions.

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    Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0336.

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    Length: 49
    Date of creation: Jul 2003
    Handle: RePEc:cam:camdae:0336
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    1. Baumol, William J, 1982. "Contestable Markets: An Uprising in the Theory of Industry Structure," American Economic Review, American Economic Association, vol. 72(1), pages 1-15, March.
    2. Severin Borenstein & James Bushnell & Christopher R. Knittel, 1999. "Market Power in Electricity Markets: Beyond Concentration Measures," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 65-88.
    3. Jay Morse, 1997. "Regulatory Policy Regarding Distributed Generation by Utilities: The Impact of Restructuring," The Energy Journal, International Association for Energy Economics, vol. 0(Special I), pages 187-210.
    4. Newbery, D.M. & Pollitt, M.G., 1996. "The Restructuring and Privatisation of the CEGB: Was It Worth It?," Cambridge Working Papers in Economics 9607, Faculty of Economics, University of Cambridge.
    5. Stirling, Andrew, 1997. "Limits to the value of external costs," Energy Policy, Elsevier, vol. 25(5), pages 517-540, April.
    6. Baumol, William J & Bradford, David F, 1970. "Optimal Departures from Marginal Cost Pricing," American Economic Review, American Economic Association, vol. 60(3), pages 265-283, June.
    7. Richard Schmalensee, 1993. "Symposium on Global Climate Change," Journal of Economic Perspectives, American Economic Association, vol. 7(4), pages 3-10, Fall.
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