Market Power, Fuel Substitution and Infrastructure: A Large-Scale Equilibrium Model of Global Energy Markets
34 Pages Posted: 7 May 2014
Date Written: March 2014
Assessing and quantifying the impacts of technological, economic, and policy shifts in the global energy system requires large-scale numerical models. We propose a dynamic multi-fuel market equilibrium model that combines endogenous fuel substitution within demand sectors and in power generation, detailed infrastructure capacity constraints and investment, as well as strategic behaviour and market power aspects by suppliers in a unified framework. This model is the first of its kind in which market power is exerted across several fuels. Using a dataset based on the IEA World Energy Outlook 2013 (New Policies scenario, time horizon 2010-2050, 30 regions, 10 fuels), we illustrate the functionality of the model in two scenarios: a reduction of shale gas availability in the US relative to current projections leads to an even stronger increase of power generation from natural gas in the European Union relative to the base case; this is due to a shift in global fossil fuel trade. In the second scenario, a tightening of the EU ETS emission cap by 80% in 2050 combined with a stronger bio-fuel mandate spawns a renaissance of nuclear power after 2030 and a strong electrification of the transportation sector. We observe carbon leakage rates from the unilateral mitigation effort of 60-70%.
Keywords: energy system model, infrastructure investment, strategic behaviour, mixed complementarity problem (MCP), generalized Nash equilibrium (GNE)
JEL Classification: Q41, C61, D43
Suggested Citation: Suggested Citation