Research

Sustainable Energy Transition

Sustainable energy transition aims at drastically reducing fossil fuel consumption in society while simultaneously ensuring resource-efficient and reliable energy supply. This research program analyzes by way of formal economic analysis and econometric methods how markets function, and how market designs and regulatory frameworks can be improved to achieve the sustainable energy transition.
 

Ecologically sustainable energy supply requires that the world drastically reduces fossil fuel consumption. Increased electrification, for instance in transport and industrial processes, is a key part of the solution. At the same time, electricity generation and heating are the world’s largest sources of greenhouse gas emissions. To combat climate change, society must, therefore, increase non-fossil electricity generation. In Sweden, the goal has been set to 100% renewable electricity generation by 2040.

Economically sustainable energy supply is resource-efficient and reliable. However, there is disagreement about what a sustainable energy system looks like. Many countries phase-out nuclear power, whereas China and other countries with fast-growing electricity demand see nuclear power as a key component of future electricity supply. Important questions, therefore, revolve around the future of nuclear power.

Sweden is part of the integrated Nordic electricity market. This market consists of two main parts. One is the liberalized wholesale and retail market. The other is the regulated electricity network. The main argument for liberalization was that market-based generation and investment decisions would increase the efficiency of electricity supply.

This research program focuses on analyzing the electricity market in light of the objectives of a resource-efficient, reliable, and ecologically sustainable energy supply. Also, the incentives for energy-intensive sectors such as manufacturing and transportation to shift away from fossil fuels are fundamental to achieve sustainable development. The program applies formal theoretical analysis and econometric tools to investigate how the energy market and energy-intensive sectors function, and how market designs and regulatory frameworks can be improved to achieve sustainable energy transition.

The projects within the program are mainly financed by the Swedish Energy Agency.

The following researchers are the main participants in the program at IFN: Pär Holmberg, Erik Lundin, and Thomas Tangerås.

Program Director: Thomas Tangerås

 

News

Joint ownership of nuclear power increases wholesale electricity prices

In a paper recently accepted by Journal of Industrial Economics,  Erik Lundin conducts an empirical investigation of the anticompetitive effects of joint ownership, by examining the operation of three nuclear plants in Sweden.  Using data on production and bidding curves on the day-ahead market, the model is tested against data for three behavioral assumptions: Unilateral profit maximization; joint profit maximization; and a social planner. Modeling for joint profit maximization best matches data, indicating that joint ownership has facilitated the coordination of maintenance decisions. Terminating the joint ownership and modeling for unilateral profit maximization would lead to a 5 percent decrease in prices and a 6 percent decrease in system production costs.

Download: Market power and joint ownership: Evidence from nuclear plants in Sweden by Erik Lundin

Projects

Women are more in favor of climate policy than men

It is well-known that men and women differ in their views regarding the severity of climate change. Based on unique survey data from the Swedish Environmental Protection Agency, Niklas Elert and Erik Lundin confirm that such gender differences also exist in the support for climate policy and for undertaking climate action. Swedish women worry more about climate change and perceive it to be a bigger threat than men do. Furthermore, women report greater support than men for policies to mitigate climate change through political interventions, and also undertake more voluntary actions to achieve this goal.

Download: Gender and climate action by Niklas Elert and Erik Lundin

A new tool to capture the system costs of intermittent renewable electricity generation 

This paper develops a new tool, locational marginal network tariffs, to internalize the costs of maintaining system balance that arise from intermittent renewable generation. It demonstrates the practical applicability of this approach by applying the theory to obtain quantitative results for the California electricity market.

Download: Locational marginal network tariffs for intermittent renewable generation by Thomas Tangerås and Frank A. Wolak

An efficient compensation system for reserve capacity in a competitive electricity market

In many countries, producers receive financial compensation for maintaining reserve capacity on the grid. The purpose is to avoid scarcity events during which either the price of electricity becomes extremely high or consumers are curtailed in order to maintain system balance. This research paper shows how to design an efficient compensation mechanism in a market with a competitive electricity supply.  

Download: Capacity mechanisms and the technology mix in competitive electricity markets by Pär Holmberg and Robert A. Ritz 

Flow-based pricing of electricity in the spot market increases efficiency

Electricity markets in Europe apply area-based pricing, which implies that bottlenecks within the different price areas are neglected in the clearance of spot markets. Several European countries have recently introduced flow-based pricing to better account for such bottlenecks. These two research papers conduct theoretical analysis and model simulations which indicate that the efficiency of electricity supply is likely to increase as a consequence of this change in market design, not least because inefficient arbitrage between the spot and real-time markets is likely to decrease.

Download: Redispatch in zonal pricing electricity markets by Mario Blázquez de Paz

Download: Production efficiency of nodal and zonal pricing in imperfectly competitive electricity markets by Mahir Sarfati, Mohammad Reza Hesamzadeh and Pär Holmberg

Does central dispatch improve electricity supply?

This research paper compares how different electricity markets in Europe and the USA allocate production capacity and incorporate network bottlenecks in the market outcome. The main question is whether electricity supply can be improved by changing the present Nordic model of self-dispatch in favor of a model with central dispatch. The main lesson to be learned from US markets concerns how to efficiently account for network bottlenecks. But these are not sufficient reasons to abandon the Nordic model, in particular, because increasing shares of intermittent renewable electricity supply favors decentralized dispatch.

Download: Central- versus self-dispatch in electricity markets by Victor Ahlqvist, Pär Holmberg, and Thomas Tangerås

Simulation of arbitrage trading in a large zonal price electricity market

European wholesale electricity markets apply zonal pricing. As a consequence, the price is determined in a certain way at the day-ahead market and a different way at the real-time market, which generates inefficiencies. The authors develop in two research papers a simulation model and solution algorithm that enables to quantify this inefficiency in a large electricity network.

Download: Increase-decrease game under imperfect competition in two-stage zonal power markets –​ Part I: Concept Analysis and Part II Solution algorithm by Mahir Sarfati, Mohammad Reza Hesamzadeh och Pär Holmberg

How to create an integrated electricity market?

The world’s first multinational electricity market was formed with the creation of the Nordic power exchange, Nord Pool. Lars Persson and Thomas Tangerås analyze the incentives to undertake transmission network investment in the context of the liberalized Nordic electricity market. Welfare improving investment in a multinational electricity market requires accounting for the cross-border effects of capacity expansion. The authors propose methods to increase voluntary cooperation on international infrastructure projects, with an aim to increase aggregate efficiency and achieve equitable distribution of the gains from market integration.

Download: Transmission network investment across national borders: The liberalized Nordic electricity market by Lars Persson and Thomas Tangerås

Standard market designs increase competition while maintaining price equality for consumers 

Thomas Tangerås and Frank A.Wolak show that a common regulatory mandate in electricity markets that use location-based pricing can increase the performance of imperfectly competitive wholesale electricity markets. Requiring all customers to purchase their wholesale electricity at the same quantity-weighted average of the locational prices strengthens the incentive for vertically integrated firms to participate in the retail market, which increases competition in the short-term wholesale market. In contrast, linking locational markets through a long-term contract that clears against the quantity-weighted average of short-term wholesale prices does not impact average wholesale market performance. These results imply that a policy designed to address equity considerations can also enhance efficiency in wholesale electricity markets.

Download: The competitive effects of linking electricity markets across space and time by Thomas Tangerås and Frank A.Wolak

Production or transmission investment?

Mario Blázquez de Paz analyzes the effects of investments in transmission and production capacity on consumer welfare and suppliers’ profits. In the specific context of the model, consumer welfare is shown to be higher when the transmission network is expanded compared to an increase in capacity.

Download: Production on transmission investments? A comparative study by Mario Blazquez de Paz

Market design in electricity markets with transmission constraints

Electricity markets are becoming increasingly integrated. In this research paper, Mario de Blazquez de Paz analyses the performance of uniform and discriminatory price auctions in the presence of transmission constraints and transmission costs. The main finding is that the discriminatory price auction could outperform the uniform price auction when transmission constraints are binding.

Download: Auction performance on wholesale electricity markets in the presence of transmission constraints and transmission costs by Mario Blazquez de Paz

Is there insider trading on the Nordic intra-day electricity market?

In this research paper, Ewa Lazarczyk conducts an empirical investigation of market participants’ reactions to news about sudden production and transmission failures on the electricity grid - so-called urgent market messages (UMMs). Market prices in the intra-day market respond to UMMs. However, there is also a significant effect on prices immediately prior to UMM announcement, indicating that private information exists and is being used for trading on the intra-day market.

Download: Public and private information on the Nordic intra-day electricity market by Ewa Lazarczyk

International cooperation

Visiting researchers

Collaborating with others is essential for IFN as a research institute. Our researchers co-author articles with colleagues from other institutes, and many also teach at various universities and colleges.

As part of our extensive program of guest researchers, leading international researchers visit the institute. The visitors present and pursue their research as well as interact and cooperate with researchers at IFN.

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