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Economics of Energy & Environmental Policy
Volume 10, Number 2





Symposium on ‘EEEP@10—Ten Years Economics of Energy & Environmental Policy’



EEEP@10—An Introduction

Christian von Hirschhausen, Valerie J. Karplus, and Juan Rosellón



Policies and Institutions to Support Carbon Neutrality in China by 2060

Michael Davidson, Valerie J. Karplus, Da Zhang, Xiliang Zhang

DOI: 10.5547/2160-5890.10.2.mdav
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Abstract:
China's leadership has announced its aim to achieve carbon neutrality at the national level by 2060. Recent statements clarify that the country's pledge applies to all greenhouse gases. This review examines the extent to which current policies and institutions would need to evolve to support deep decarbonization in the world's largest emitting nation. First, we describe the landscape of policies related to climate change mitigation, focusing on planning targets, command-and-control policies, and market-based instruments. Second, we discuss the institutional landscape in the energy sector and identify changes that could improve the effectiveness of climate policies. Third and finally, we discuss how international action in the realms of climate negotiations, trade, and technological innovation could help clear the path to the 2060 goal. Our policy review illustrates how market-based elements are increasingly being incorporated into existing command-and-control policies or layered on top of them. This approach may be most successful if it can generate influential beneficiaries early on while reducing expected costs over time.




Modelling Net Zero and Sector Coupling: Lessons for European Policy Makers

Michael G. Pollitt and Chi Kong Chyong

DOI: 10.5547/2160-5890.10.2.mpol
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Abstract:
This paper seeks to discuss some of the policy implications which arise from the modelling of Net Zero GHG emissions in 2050 within a sector coupling approach. We draw on a major study of the EU-UK energy system in 2050 produced by the Centre for Regulation in Europe (Chyong et al. 2021), which involved stakeholders from both electricity and gas sectors in a year-long modelling exercise of the European energy system. While no model of the future is an accurate forecast, an optimisation model of the Net Zero energy system is very helpful in clarifying the role the modelled technologies might play in a future energy system under binding government policy targets. What our modelling highlights is that the achievement of Net Zero depends on the massive scale up of variable renewable electricity, biomethane, hydrogen and carbon capture and storage (CCS) technologies. Failure to simultaneously scale up these technologies quickly will threaten the ability to achieve the Net Zero target by 2050.




New Transactions in Electricity: Peer-to-Peer and Peer-to-X

Jean-Michel Glachant and Nicolò Rossetto

DOI: 10.5547/2160-5890.10.2.jgla
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Abstract:
Peer-to-peer and peer-to-x open a new world of transactions in the electricity sector. This world is characterised by the active involvement of new players, both small in size and non-professional in nature, and by new combinations of the activities carried out behind and in front of the meter. Peer-to-peer refers to transactions in which both the seller and the buyer are small in size and non-professional, whereas peer-to-x refers to transactions where only the seller is small and non-professional while the buyer is a different type of actor. Observations from the world of practice reveal the existence of multiple forms of peer-to-peer and peer-to-x transactions. The first part of the paper identifies six typical forms of transactions and illustrates them with concrete implementation cases. The second part simplifies such diversity of types and distinguishes only four families of transactions. The third shows the importance of three components which are essential to the functioning of this new world. They are the matching loop, as small players cannot sell or buy from other peers so easily; the pricing mechanism, as existing wholesale and retail markets exert pressure on incentives for activating peers; and the delivery loop, as peers must deliver via existing grids and system operators, except when trading entirely within private networks.




Facilitating Transmission Expansion to Support Efficient Decarbonization of the Electricity Sector

Paul L. Joskow

DOI: 10.5547/2160-5890.10.2.pjos
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Abstract:
Many governments, electric utilities, and large electricity consumers have committed to deep decarbonization of the electricity sector by 2050 or earlier. Over at least the next 30 years, achieving decarbonization targets will require replacing most fossil-fueled generators with zero carbon wind and solar generation along with energy storage to manage intermittency and for balancing more broadly. The best wind and solar resources are located in geographic areas that are often far from the locations of the legacy stock of generating plants and their supporting transmission infrastructure. Many studies have found that achieving decarbonization targets in a cost-efficient manner will require significant investments in new intra-regional and inter-regional transmission capacity. However, there are numerous barriers to planning, building, compensating, and financing this transmission capacity. They go beyond "NIMBY" opposition. These barriers are identified and potential reforms to reducing them are discussed here. The focus is on the U.S. and Europe. Comparing and contrasting U.S. and European responses to similar challenges yields suggestions for institutional, regulatory, planning, compensation and cost allocation policies that can reduce the barriers to efficient expansion of transmission capacity.




Transmission Network Investment in a Time of Transition

Mohammad Reza Hesamzadeh, Darryl R. Biggar, Juan Rosellón, and Hossein Hesamzadeh

DOI: 10.5547/2160-5890.10.2.chir
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Abstract:
The electricity sector is in an unprecedented time of transition. The industry is in the process of adjusting from traditional fossil-fuel to renewable generation, from large-scale to distributed generation and from vertically-integrated monopolies to verticallyseparated industrial structuresunder diverse formsof competition.Efficient transmission investment planning and regulation is more important than ever, but this task has become extremely complex. Increasing penetration of intermittent generation makes predicting network flow patterns increasingly difficult. Moreover, the potential role for hydrogen as an alternative energy source in both domestic and transportation uses, makes predicting the long-term future of electricity demand more uncertain than at any time in its history. In this paper, we review key issues in electricity transmission investment and regulation. We start by reviewing the task of the theoretical well-intentioned network planner, and the complications that arise when transmission investment is separated from generation investment. We then review the issues associated with governing the transmission planner, including the question whether it is possible to design a financial mechanism which delivers correct incentives. We also discuss the question of whether it is possible to design a mechanism which allows transmission investment to be left entirely to the private sector. We finish with a summary of the key future challenges facing the sector in this time of transition.




Fossil Natural Gas Exit – A New Narrative for the European Energy Transformation Towards Decarbonization

Christian von Hirschhausen, Claudia Kemfert, and Fabian Praeger

DOI: 10.5547/2160-5890.10.2.chir
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Abstract:
This paper discusses the potential role of fossil natural gas in the process of the energy transformation in Europe on its way to decarbonization. Mainstream conventional wisdom has it that natural gas, perhaps in combination with other gases, should maintain an important role in the energy mix, first, as a "bridge fuel", and then through a gradual transition toward "decarbonized gases". However, when considering the ambitious climate targets of the EU and the subsequent need for far-reaching decarbonization, in combination with technical constraints and the results from our own energy system modeling, we arrive at a contrasting result: The disappearance of fossil natural gas and its corresponding infrastructure is the next logical step of the transformation process in Europe. The paper provides a review of the issues at stake and deconstructs the dominant narrative through a detailed technical description of different energy gases and their real climate effectiveness, as well as results from energy system modeling. We conclude that the phase-out of fossil natural gas in Europe needs to be completed towards 2040 in order to comply with climate targets and provide planning reliability for policy-makers and the industry.




Articles

Electric Vehicles Rollout—Two Case Studies

Fridrik M. Baldursson, Nils-Henrik M. von der Fehr, and Ewa Lazarczyk

DOI: 10.5547/2160-5890.10.2.fbal
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Abstract:
We present and discuss evidence on electric-vehicle rollout in The Netherlands and Norway, two forerunners in this area. We demonstrate that the uptake of electric vehicles is essentially driven by financial and other benefits offered to their owners, and that a partial electrification of the vehicle fleet may be achieved even with limited public charging infrastructure; indeed, infrastructure has tended to follow the development of electric vehicles. The impact on the electricity industry in general and electricity networks in particular has so far been limited, even given the relatively high penetration of electric vehicles.




Empower the Consumer! Energy-related Financial Literacy and its Implications for Economic Decision Making

Julia Blasch, Nina Boogen, Claudio Daminato, and Massimo Filippini

DOI: 10.5547/2160-5890.10.2.jbla
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Abstract:
Untapped energy savings potential in the residential sector might lead to substantial welfare losses. While several studies have focused on the role of behavioral biases in explaining the lack of adoption of energy-efficient durable goods, little is known about the role of limited energy-specific knowledge and financial literacy. In this paper, we propose an integrated concept of ‘energy-related financial literacy’, which combines both energy cost-specific knowledge and skills needed to process this information. Using data from a large household survey in three European countries, we explore the determinants of different measures of literacy and, most importantly, we provide empirical evidence on the association between limited knowledge and skills to perform an intertemporal optimization and the adoption of energy-efficient light bulbs. Our findings support the promotion of energy-specific financial education programs and tools to increase the adoption of energy-efficient durable goods.




Incentive Regulation of Electricity and Gas Networks in the UK: From RIIO-1 to RIIO-2

Tooraj Jamasb

DOI: 10.5547/2160-5890.10.2.tjam
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Abstract:
The regulatory and operating context of energy networks is dynamic and constantly evolving. Achieving a multitude of economic, environmental, social and policy objectives is a challenging task for the sector regulators. In 2010, the UK energy regulator Ofgem replaced its approach to energy network price control and incentive regulation with a Revenue-Incentive-Innovation-Output (RIIO-1) model. This paper reviews the incentive areas that influence the performance of the next version of the model (RIIO-2). Guided by the principles of regulatory economics and evidence in the literature, we discuss key aspects and incentive properties of the regulation model under revision by the regulator. The lessons of experience from the RIIO models are also relevant for regulators in other countries and can inform their design of incentive regulation of energy networks.




Biomethane for Electricity in Mexico: A Prospective Economic Analysis

Héctor M. Núñez

DOI: 10.5547/2160-5890.10.2.hnun
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Abstract:
Mexico has important clean energy goals for the next ten years. While the previous administration promoted a competitive electricity market and ambitious environmental goals, the current administration has targeted higher revenues from the national power company. Second- generation biomethane, however, can meet both of these objectives because it substitutes imported natural gas, so it does not compete with the domestic electricity supply, and it helps to meet environ- mental goals. This paper develops an economic framework to provide insight into the economic and environmental effects of policy alternatives promoting the biomethane industry. Results show that maintaining the status quo policy will prioritize electricity company revenues and biomethane production will not occur, while a first-best policy will promote this industry more and yield the highest social welfare.




Aiming for Carbon Neutrality: Which Environmental Taxes Does Spain Need by 2030?

Jorge Blazquez, Jose Maria Martin-Moreno, Rafaela Perez, and Jesus Ruiz

DOI: 10.5547/2160-5890.10.2.jblz
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Abstract:
The Green Deal is a new European strategic plan aiming to achieve carbon neutrality in 2050 with a 55%-reduction in emissions by 2030 as an intermediate target. In the next three decades European policymakers will use a wide set of policy levers to achieve these targets, including taxes on fossil fuels and carbon prices. In this context, this study uses a competitive general equilibrium model for a small open economy to identify the optimal tax-mix for oil, natural gas, and coal in Spain for a given target of carbon emissions from energy use. The ambitious environmental target for 2030 requires a tax increase of around 50 percentage points in the case of oil, 200 percentage points in the case of natural gas, and 700 percentage points in the case of coal. Alternatively, Spain could replace those taxes on fossil fuels by a carbon tax of 150 €/tCO2, being this level a reference on the carbon price needed to achieve the new European target. This study shows that an optimal mix of taxes or a carbon tax lead to approximately the same welfare loss in the long run, although welfare losses during the transition are slightly higher in the case of the carbon tax when the emissions target is very ambitious. A useful policy insight from this paper is that the current tax rates on fossil fuels are inconsistent with the new European target and, therefore, significant increases are needed, or a considerable higher carbon price is required.




The Cost of Finance and the Cost of Carbon: A Case Study of Britain’s only PWR

David Newbery

DOI: 10.5547/2160-5890.10.2.dnew
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Abstract:
This paper argues that the cost of decarbonising depends critically on the Weighted Average Cost of Capital (WACC), illustrated with a case study of Sizewell B (SZB, the nuclear station commissioned in 1995). It calculates the cost per tonne of CO2 abated with prices set as for transmission assets by the regulator under the Regulatory Asset Base model. The cost depends critically on the WACC set in comparable utility price controls. At a low WACC the cost is £201936.2/tonne CO2 abated and £201943.3/t. CO2 at the high WACC, compared with the roughly £40/t. CO2 paid by GB generators in 2019. Moving from the social discount rate of 2.5% to a hurdle rate of 8% increases the cost from £15–20/t. to over £60/t. Had Britain continued building replicas of SZB the cost saving compared to the current programme might be £20199–19 billion.




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