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Optimal Regulation of Electricity Provision with Rolling and Systemic Blackouts

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  • Catherine Bobtcheff
  • Philippe De Donder
  • François Salanié

Abstract

We set up a static model of electricity provision in which delivery to consumers is only imperfectly reliable. Blackouts can be either rolling or systemic; in both cases a price cap becomes active on the wholesale market. We show that for any given value of the price cap, one can decentralize optimal allocations thanks to two types of regulatory instruments: a retail tax, and capacity subsidies. Some properties follow. If demand is affected by multiplicative shocks only, capacity subsidies are exactly financed by the revenues from the retail tax. If moreover the distribution of systemic blackouts is exogenous, a price cap is sufficient, provided it is set at the value of lost load. In all other cases, all instruments are needed, and capacity subsidies need to be differentiated, based on the correlation between available capacity and its social value. We also discuss the impacts of a carbon tax on supply, demand, and optimal regulation.

Suggested Citation

  • Catherine Bobtcheff & Philippe De Donder & François Salanié, 2025. "Optimal Regulation of Electricity Provision with Rolling and Systemic Blackouts," CESifo Working Paper Series 12092, CESifo.
    • Handle: RePEc:ces:ceswps:_12092
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    References listed on IDEAS

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    1. Fabra, Natalia, 2018. "A primer on capacity mechanisms," Energy Economics, Elsevier, vol. 75(C), pages 323-335.
    2. Severin Borenstein & Stephen Holland, 2005. "On the Efficiency of Competitive Electricity Markets with Time-Invariant Retail Prices," RAND Journal of Economics, The RAND Corporation, vol. 36(3), pages 469-493, Autumn.
    3. Frank Wolak, 2013. "Economic and Political Constraints on the Demand-Side of Electricity Industry Re-structuring Processes," Review of Economics and Institutions, Università di Perugia, vol. 4(1).
    4. Joskow, Paul L., 2022. "From hierarchies to markets and partially back again in electricity: responding to decarbonization and security of supply goals," Journal of Institutional Economics, Cambridge University Press, vol. 18(2), pages 313-329, April.
    5. Haar, Lawrence, 2021. "The competitive disadvantages facing British assetless electricity retailers," Energy Policy, Elsevier, vol. 155(C).
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    Keywords

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    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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