Efficiency in Wholesale Electricity Markets: On the Role of Externalities and Subsidies

38 Pages Posted: 10 Nov 2020

See all articles by Sylwia Bialek

Sylwia Bialek

New York University, Institute for Policy Integrity

Burcin Unel

Institute for Policy Integrity at NYU School of Law

Date Written: 2020

Abstract

This paper studies the effects of capacity market reforms that the U.S. grid operators have undertaken in response to state-level subsidies paid to emission-free electricity generation. We first derive an analytical model of energy-and-capacity markets that allows us to predict the price and resource mix effects of subsidies, as well as to understand their welfare implications. We confirm that while the subsidies, even when combined with energy consumption taxes, generally cannot achieve first-best outcomes. We also show there exists a range of subsidy rates that are welfare-enhancing when greenhouse gas externalities are taken into account. Finally, we focus on the evaluation of capacity market reforms similar to those in PJM, ISO-NE, and NYISO, finding that such reforms are likely to decrease welfare.

JEL Classification: Q280, Q420, Q580, Q410

Suggested Citation

Bialek, Sylwia and Unel, Burcin, Efficiency in Wholesale Electricity Markets: On the Role of Externalities and Subsidies (2020). CESifo Working Paper No. 8673, Available at SSRN: https://ssrn.com/abstract=3727748 or http://dx.doi.org/10.2139/ssrn.3727748

Sylwia Bialek (Contact Author)

New York University, Institute for Policy Integrity ( email )

Bobst Library, E-resource Acquisitions
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HOME PAGE: http://https://sites.google.com/site/sylwiabialekecon

Burcin Unel

Institute for Policy Integrity at NYU School of Law ( email )

139 MacDougal St
New York, NY 10012
United States

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