The effects of wind generation capacity on electricity prices and generation costs: a Monte Carlo analysis

We use Monte Carlo analysis to examine the potential of increased renewable generation to provide a hedge against variability in energy prices and costs. Fuel costs, electricity demand and wind generation are allowed to vary and a unit commitment and economic dispatch algorithm is employed to produce cost-minimizing generation schedules under different levels of installed wind capacity. Increased wind capacity reduces the mean and the variance of production costs but only the variance of electricity prices. Wind generators see their market revenues increase while consumer payments and fossil generator profits do not considerably vary as wind capacity increases. Risk aversion is captured by considering the conditional value-at-risk for both consumers and producers. The optimal level of wind generation increases as risk aversion increases due to the potential of wind to act as a hedge against very high electricity prices in high fuel price scenarios.     

Regulatory design and incentives for renewable energy

Increasing electric power production from renewable energy sources is currently one of the major objectives of energy policy. The intermittent nature of renewables, such as wind and solar, necessarily imposes complex trade-offs for regulatory objectives, such as resource adequacy (and system reliability) versus reductions in green house gas emissions. We develop a highly stylized model of investments in order to derive insights regarding the workings of regulatory incentives for increased renewable energy. We first show that incentives are indeed needed when there are significant economies of scale in the form of “learning by doing” or alternatively, when there is excess capacity in conventional technology due to legacy investments. We analyze two different regulatory schemes (feed-in tariffs and renewable portafolio standards) aimed at increasing investment in renewable capacity. We show that neither scheme is capable of inducing the socially optimal level of investment in renewable capacity. A single feed-in tariff fails to induce optimal investment as a feed-in tariff exceeding marginal costs of conventional technology incentivizes over-development of the most attractive sites which preempts investment in less attractive, yet socially valuable sites. A renewable portfolio standard that promotes increased investment in renewable technology induces under-investment in the conventional technology. These results suggest that a “clinical” regulatory design, that is, one that promotes the right amount of renewable capacity without affecting conventional capacity is a challenging proposition.     

Electricity provision with intermittent sources of energy

We analyze the interaction between a reliable source of electricity production and intermittent sources such as wind or solar power. We first characterize the optimal energy mix, emphasizing the availability of the intermittent source as a major parameter for the optimal investment in capacity. We then analyze decentralization through competitive market mechanisms. We show that decentralizing the efficient energy mix requires electricity to be priced contingently on the availability of the intermittent source. By contrast, traditional meters impose uniform pricing, which distorts the optimal mix of energy sources. Decentralizing the efficient energy mix with uniform prices requires either cross-subsidies from the intermittent source to the reliable source of energy or structural integration of the two types of technology.     

Defining and classifying ecosystem services for decision making

The concept of ecosystems services has become an important model for linking the functioning of ecosystems to human welfare. Understanding this link is critical for a wide-range of decision-making contexts. While there have been several attempts to come up with a classification scheme for ecosystem services, there has not been an agreed upon, meaningful and consistent definition for ecosystem services. In this paper we offer a definition of ecosystem services that is likely to be operational for ecosystem service research and several classification schemes. We argue that any attempt at classifying ecosystem services should be based on both the characteristics of the ecosystems of interest and a decision context for which the concept of ecosystem services is being mobilized. Because of this there is not one classification scheme that will be adequate for the many contexts in which ecosystem service research may be utilized. We discuss several examples of how classification schemes will be a function of both ecosystem and ecosystem service characteristics and the decision-making context.     

Price cap regulation of a dominant firm facing competition

Price cap regulation is typically applied to natural monopolies operating with subadditive costs. Price caps are known to provide superior incentives for the regulated monopoly to pursue cost reduction and, in a multiservice/product context, undertake welfare enhancing price discrimination. It is well known that capping a Laspeyres index of the firm’s prices induces the monopoly to charge socially optimal “Ramsey” prices in the long run. This paper examines the suitability of the Laspeyres form of regulation when the regulated firm faces competition in the market for one of its services (outputs). We present the appropriately modified Ramsey pricing rule for the regulated dominant firm and demonstrate that capping a Laspeyres index of the dominant firm’s prices leads to prices that satisfy this pricing rule in the long run.     

An experimental investigation of soft price caps in uniform price auction markets for wholesale electricity

This paper presents the results from an auction experiment using industry professionals and student participants who compete in a simulated wholesale market for electricity. Motivated by the intervention by FERC in response to the “meltdown” of the California spot market, we investigate the effect of including a “soft” price cap in a uniform price auction as a means of mitigating high prices. When prices are driven above the soft cap, offer curves become flat, in contrast to the hockey stick shape observed in a typical uniform price auction for electricity. This flat offer curve leads to market prices that are relatively insensitive to both generation costs and demand reductions.      

The underdevelopment of service industry in china: An empirical study of cities in Yangtze River Delta

The service industry in China is underdeveloped, in comparison with not only the past experience of developed countries at the similar level of GDP per capita, but also other similar developing countries at present. We define this deviation of China’s service industry from the development trend in other countries as the “development deviation puzzle,” and propose a conceptual framework based on the “manufacturing cost disease” hypothesis to understand the reasons behind this puzzle. We test our hypothesis using the data from the urban cluster in Yangtze River Delta. The results indicate that labor productivity growth in service industry is driven by capital investment and the “development deviation puzzle” is indeed rooted in the “manufacturing cost disease.” Our analysis suggests that, to correct the underdevelopment of service industry, the strategy of investment-driven industrialization and urbanization must be changed. Expansion of producer services is important in increasing the intensities of human capital and foreign investment.     

Firm reputation with hidden information

Summary. An adverse selection model of firm reputation is developed in which short-lived clients purchase services from firms operated by overlapping generations of agents. A firm's only asset is its name, or reputation, and trade of names is not observed by clients. As a result, names are traded in all equilibria regardless of the economy's horizon The general equilibrium analysis links the value of a name to the market for services. This causes a non-monotonicity that precludes higher types from sorting themselves through the market for names, and leads to “sensible” dynamics: reputations, and name prices, increase after success and decrease after failure. Received: July 31, 2001; revised version: December 20, 2001 RID="*" ID="*" I thank Jon Levin, Eric Maskin and Drew Fudenberg for valuable discussions, and Heski Bar-Isaac for comments on an earlier draft. Financial support from the National Science Foundation (NSF grants SBR-9818981 and SES-0079876) is gratefully acknowledged. This paper replaces an older (and incomplete) working paper titled “Reputation with Hidden Information”.     

Market power in the Spanish electricity auction

Hourly data from the Spanish day-ahead electricity auction is used to obtain a lower bound measure of generators’ market power. Our method is not based on cost estimates but rather on the behavioral differences between strategic generators and more competitive producers. The results indicate that, despite the price cap effect of regulation in this market, the larger operators in the day-ahead market are able to increase significantly prices above the competitive benchmark. We also show that the two large generators do not exploit the full potential of their market power.     

Separating complements: the effects of competition and quality leadership

The literature on the tragedy of the anticommons typically suggests that producers of complementary goods should integrate themselves. Recent decisions by the antitrust authorities seem however to indicate that there exists a tradeoff between the “tragedy” and the lack of competition characterizing an integrated market structure. In this paper we analyze such tradeoff in oligopolistic complementary markets when products are vertically differentiated. We show that quality leadership plays a crucial role. When there is a quality leader, forcing divestitures or prohibiting mergers, thus increasing competition, lowers prices and enhances consumer surplus. However, when quality leadership is shared, “disintegrating” firms may lead to higher prices. In this case, concerns about the tragedy of the anticommons are well posed in antitrust decisions.     

Price Volatility and Banking in Green Certificate Markets

There is concern that prices in a market for Green Certificates (GCs) primarily based on volatile wind power will fluctuate excessively, leading to corresponding volatility of electricity prices. Applying a rational expectations simulation model of competitive storage and speculation of GCs the paper shows that the introduction of banking of GCs may reduce price volatility considerably and lead to increased social surplus. Banking lowers average prices and is therefore not necessarily to the benefit of “green producers”. Proposed price bounds on GC-prices will reduce the importance of banking and even of the GC system itself.The paper benefited from presentations at Copenhagen University, Stockholm School of Economics and University of Iceland. Thanks are due to Lars Bergman, Torstein Bye, Pauli Murto and participants in the Nordic Energy Research Program (NERP).     

Pricing and capacity provision in electricity markets: an experimental study

The creation of adequate investment incentives has been of great concern in the restructuring of the electricity sector. However, to achieve this, regulators have applied different market designs across countries and regions. In this paper we employ laboratory methods to explore the relationship between market design, capacity provision and pricing in electricity markets. Subjects act as firms, choosing their generation capacity and competing in uniform price auction markets. We compare three regulatory designs: (1) a baseline price cap system that restricts scarcity rents, (2) a price spike regime that effectively lifts these restrictions, and (3) a capacity market that directly rewards the provision of capacity. Restricting price spikes leads to underinvestment. In line with the regulatory intention both alternative designs lead to sufficient investment albeit at the cost of higher energy prices during peak periods and substantial capacity payments in the capacity market regime. To some extent these results confirm theoretical expectations. However, we also find lower than predicted spot market prices as sellers compete relatively intensely in capacities and prices, and the capacity markets are less competitive than predicted.     

Exploring policy options in joint intertemporal-spatial trade models using an incomplete markets approach

In this paper we discuss the desirability of service trade liberlization in the presence of incompleteness of markets where there is both inter-spatial and intertemporal trade between countries. We use numerical simulation methods for insights and relate our discussion to the General Agreement on Trade in Services (GATS) in the WTO. We interpret the absence of intertemporal trade as an absence of intermediation services provided by both domestic and foreign service providers. For simplicity, we consider extreme cases where intertemporal intermediation services can only be provided by domestic providers, so that when intertemporal trade in services is not allowed, markets are not complete. To our knowledge, this type of models is not used in the trade literature as general comparative statics results are unavailable. We first consider the liberalization of trade in financial services in an inter-spatial and intertemporal model of two countries, and we show how services liberalization can be welfare worsening in the presence of a tariff on spatial trade in goods. We show that this can hold in an artificial world with no domestic financial services provider. We compare financial service trade autarky in which there is no intermediation to financial service trade liberalization which involves costless intertemporal intermediation provided by foreign service providers. We also consider a more complex (and realistic) world where costly intermediation services can be provided by both domestic and foreign providers. This paper draws in part on material of an earlier paper, “Financial Services Trade Liberalization in A Joint Spatial Intertemporal Multi-Country Model” by Huang et al. (2004). We acknowledge the financial support from The Centre for Intentional Governance Innovation (CIGI), Waterloo, Canada and from National Social Science Foundation of China (SSFC Grant 07AJL002), National Natural Science Foundation of China (NSFC Grant 70825003) and “Humanities and Social Science” Major Project, Chinese Ministry of Education (Grant Number 07JJD790145).     

Does performance explain mutual fund flows in small markets? The case of Portugal

We study the performance reaction of investors in a specific small market context. Our sample includes all Portuguese open-end equity funds that invested in stocks issued by Portuguese companies in the period December 1993–June 2009. Instead of the convex flow–performance relationship usually documented for the US, we find an absence of reaction to past performance. We find no evidence to support the “smart money effect”, given that capital flows do not favour next period performance winners. We also document persistence of fund flows. Our results are consistent with the idea that large financial intermediaries have the capacity “to drive” their customers to funds with larger fees.     

The Economics of Non-Convex Ecosystems: Introduction

The word “convexity” is ubiquitous in economics, but absent fromeconomics. In this paper we explain why, and show what differenceit makes to economic analysis if ecosystem non-convexities aretaken seriously. A simple proof is provided of the connectionbetween “self-similarity” and “power laws”. We also provide anintroduction to each of the papers in the Symposium and draw outthe way in which they form a linked set of contributions.     

Credence Goods,Efficient Labelling Policies,and Regulatory Enforcement

We analyse the optimality of information revelation of hidden attributes of “credence goods” via alternative labelling procedures. When consumers are heterogeneous in their willingness to pay for the hidden attribute, producers can either self-label their products, or have them certified by a third party. The government can impose self or third party labelling requirements on either the “green” or the “brown” producers. Our benchmark model develops a condition that links the optimal imposition of third party labelling to the relative market share of each type of the good under complete information. We extend our analysis to incorporate asymmetric information and cheating by the producers. When corrupt producers can affix spurious labels, the government needs to supplement the labelling policy with costly monitoring activities. We find that mandatory self-labelling schemes generally dominate mandatory third party labelling, unless the “market share effect” greatly exceeds the “incentive-to-cheat effect”.      

The quantification and valuation of ecosystem services

This paper explores differences between economic and ecological criteria for identifying, measuring, and evaluating ecosystem services. It argues that economic stakeholders (user groups) generally do well in identifying these services and assigning prices to them. These prices arise spontaneously in—and serve to coordinate—market activity related to the environment. The relevant ecological information which markets gather and apply tends to be dispersed, contingent, particular, local, transitory, and embedded in institutions and practices. Ecologists and other scientists, in contrast, often seek to understand how ecosystems work and which populations and processes provide ecosystem services. The knowledge science seeks, unlike the information markets gather, tends to be centralized, collaborative, collective, and consensus-based; science pursues concepts and principles that are timeless and general rather than ephemeral and site-specific. The paper contrasts the dispersed and decentralized information organized by markets with the collective and centralized knowledge characteristic of science. The paper argues that the conceptual distance between market-based and science-based methods of assembling information and applying knowledge defeats efforts to determine the “value” of ecosystem services in any integrated sense.     

Evaluating active labor market programs in Romania

Using unusually rich (for transition economies) follow-up survey data and propensity score matching techniques, this paper seeks to increase our knowledge on what active labor market programs (ALMPs) work in South-East European countries by providing estimates of the effects of four ALMPs implemented in Romania in the late 1990 s. We find that three programs (training and retraining, self-employment assistance, and public employment and relocation services) had success in improving participants’ economic outcomes. In contrast, public employment was found detrimental for the employment prospects of its participants. Our sensitivity analysis also finds evidence that, in the case of training and retraining, self-employment assistance, and public employment and relocation services, operators “cream off” the most qualified candidates among the unemployed; whereas public employment seems to be used as a regional policy by “bringing work to the workers”, that is, creating jobs in high unemployment regions.     

Ecosystem services and dis-services to agriculture

Agricultural ecosystems are actively managed by humans to optimize the provision of food, fiber, and fuel. These ecosystem services from agriculture, classified as provisioning services by the recent Millennium Ecosystem Assessment, depend in turn upon a web of supporting and regulating services as inputs to production (e.g., soil fertility and pollination). Agriculture also receives ecosystem dis-services that reduce productivity or increase production costs (e.g., herbivory and competition for water and nutrients by undesired species). The flows of these services and dis-services directly depend on how agricultural ecosystems are managed and upon the diversity, composition, and functioning of remaining natural ecosystems in the landscape. Managing agricultural landscapes to provide sufficient supporting and regulating ecosystem services and fewer dis-services will require research that is policy-relevant, multidisciplinary and collaborative. This paper focuses on how ecosystem services contribute to agricultural productivity and how ecosystem dis-services detract from it. We first describe the major services and dis-services as well as their key mediators. We then explore the importance of scale and economic externalities for the management of ecosystem service provision to agriculture. Finally, we discuss outstanding issues in regard to improving the management of ecosystem services and dis-services to agriculture.