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Optimal Regulation of Electricity Provision with Rolling and Systemic Blackouts

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  • Catherine Bobtcheff

    (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

  • Philippe de Donder

    (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, CNRS - Centre National de la Recherche Scientifique)

  • François Salanié

    (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

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 has to be imposed on the wholesale market. We characterize optimal allocations and we show that for any given value of the price cap on the wholesale market, one can decentralize these 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.

Suggested Citation

  • Catherine Bobtcheff & Philippe de Donder & François Salanié, 2024. "Optimal Regulation of Electricity Provision with Rolling and Systemic Blackouts," PSE Working Papers hal-04738143, HAL.
    • Handle: RePEc:hal:psewpa:hal-04738143
    Note: View the original document on HAL open archive server: https://hal.science/hal-04738143v1
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    References listed on IDEAS

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    1. 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.
    2. 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).
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    Keywords

    Electricity; Reliability; Renewables; Climate Change;
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