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A Hotelling Model for Fixed-Cost Driven Power Generation

  • Andreas A. Renz

    ()

  • Christoph Weber

    ()

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

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
File Function: First version, 2012
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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
Contact details of provider: Postal: Universitätsstrasse 12, 45117 Essen
Phone: 0201 - 183 3633
Fax: 0201 - 183 2292
Web page: http://www.ewl.wiwi.uni-due.de

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  1. 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.
  2. 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.
  3. LAFFORGUE Gilles & MAGNE Bertrand & MOREAUX Michel, 2007. "Energy Substitutions, Climate change and Carbon sinks," LERNA Working Papers 07.01.222, LERNA, University of Toulouse.
  4. Ujjayant Chakravorty & Michel Moreaux & Mabel Tidball, 2008. "Ordering the Extraction of Polluting Nonrenewable Resources," American Economic Review, American Economic Association, vol. 98(3), pages 1128-44, June.
  5. 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.
  6. 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.
  7. Sunderkötter, Malte & Weber, Christoph, 2012. "Valuing fuel diversification in power generation capacity planning," Energy Economics, Elsevier, vol. 34(5), pages 1664-1674.
  8. 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.
  9. Chakravorty, Ujjayant & Magne, Bertrand & Moreaux, Michel, 2006. "A Hotelling model with a ceiling on the stock of pollution," Journal of Economic Dynamics and Control, Elsevier, vol. 30(12), pages 2875-2904, December.
  10. Olli Tahvonen, 1997. "Fossil Fuels, Stock Externalities, and Backstop Technology," Canadian Journal of Economics, Canadian Economics Association, vol. 30(4), pages 855-74, November.
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