Conference Agenda

We develop a model where consumers self-select into different electricity contracts based on heterogeneity in their willingness to pay, which varies over time. We characterize the demand for two contracts: (i) a fixed-price contract and (ii) a real-time pricing contract. We then derive the contract price equilibrium under two market structures that determine which firms set the fixed price: one with competitive retailers and another with a regulated monopoly. Under retail competition, selection effects make the fixed-price contract unprofitable, leading to the first-best outcome. In contrast, a regulated monopoly must account for consumers' outside options, which can result in lower social welfare compared to a setting where real-time pricing is unavailable. Finally, we extend the model to explore cross-subsidies when consumer types are private information and discuss potential extensions to renewable integration and more complex consumer behaviors.

The energy transition requires significant investment in intermittent renewable energy sources, such as solar and wind power. New generation capacities are generally procured through fixed price contracts, such as power purchase agreements and contracts for difference, or feed-in tariffs. In these designs, investors are remunerated with a strike price, and renewable technologies are selected based on their generation, regardless of their adequacy with demand and supply by other technologies. We show that fixed-price contracts implement the optimal portfolio of renewable technologies if the price is adjusted with a technology-specific bonus-malus system that depends on the correlation between renewable energy production and the wholesale electricity price. We estimate the bonus-malus for solar and wind power in California, France, Germany, and Spain and decompose it to identify the key market factors driving the adjustment. We argue that the bonus-malus measures the cost of integrating intermittent generation into the energy mix. Therefore, it should be added to the levelized cost of energy (LCOE) to obtain the economic cost of energy (ECOE), which measures the full cost of generating an additional megawatt-hour with a specific intermittent renewable energy source.

Although market integration is important to accommodate the increasing share of renewables in Europe, it also leads to price contagion from the high-price market to the low-price market, which is a politically contentious issue. To shed light on this issue, we use a novel method of panel quantile regression to estimate the impact of a new transmission cable between Norway and Germany on price formation in the two markets. Our findings are summarized in four key points. First, price convergence has on average been modest, especially compared to other drivers of prices. Our baseline results imply an increase in the average spot price of +2% in Norway, and a reduction of -4.4% in Germany. Second, there is substantial variation in the effect of the cable across the price quantiles. In fact, we find a negative effect of the cable on prices during low-price hours in Norway. Third, the cable has also affected the volatility of prices. In Norway, the price volatility has increased after the cable opened, whereas in Germany it has decreased. Fourth, the relationship between the price and several of its explanatory variables has changed after the cable opened. For example, electricity prices in Norway has become more exposed to fuel prices after the cable. Thus, it appears that Germany has not only exported higher prices to Norway, but also transferred some of its price volatility and exposure to fuel price fluctuations. Our findings have important implications for the policy discussion. To evaluate the impact of market integration on consumers, it is vital to consider not only the effect on average prices, but also its impact on the full price distribution and potential interaction effects.

Current climate polices to maintain the global mean temperature below 1.5–2 ℃ rely heavily on removing carbon from the atmosphere and particularly on bioenergy, carbon capture, and storage (BECCS). We develop a generic model and a high-dimensional empirical model for combining BECCS and carbon enhancement in existing forests. Our generic model reveals a capture and storage unit cost level above which the properties of maximizing the values of wood production and carbon sink appear opposite to those in the current models without carbon capture and storage. Our high-dimensional empirical model solved by reinforcement learning includes a detailed model on wood production economy, an individual-tree-based mixed-species model on forest growth, a 15-state variable model for carbon in forest soil, and a realistic description of biomass use for wood products and bioenergy. Using current estimates for carbon price and unit costs of capture and storage, we obtain the result that a higher carbon price decreases rotation length in boreal forestry, increases wood production and its value, and decreases carbon stored in trees and forest soil. Integrating carbon enhancement in forests and carbon capture and storage aids in mitigating potential adverse effects of carbon capture and storage on land use, food prices and biodiversity. However, it is possible that BECCS benefits wood production while climate change mitigation suffers.