Welfare analysis in an imperfectly competitive electricity market with distributed renewable generation

Abstract

This thesis aims to analyze the optimal amount of renewable electricity generation in a dominant firm and a competitive fringe model. The dominant firm(s) produces non-renewable electricity and the fringe produces renewable electricity. The fringe aims to represent the distributed renewable energy generation. The optimality stems from the trade-off between more costly but clean renewable energy and less costly but environmentally polluting non-renewable energy. The model is solved under fixed and premium tariffs and for different number of oligopoly firms, allowing examining of the differences between these two Feed in Tariff (FiT) instruments and the effects of market power and marginal costs on equilibrium outcomes. Using data from Turkish electricity market, the model is simulated over a set of chosen parameters to see the how these effects play out under different circumstances. As for theoretical results, it is shown that in concentrated electricity markets the fixed tariff outperforms the premium tariff in terms of total welfare. On the other hand, the premium tariff leads to higher renewable generation; so when the sole concern is environmental pollution premium tariff may be preferred. This pro-environment effect is most evident when the dominant sector is a monopoly. As the number of oligopoly firms increases and the market becomes less concentrated, the outcomes under the two policy instruments become close to each other. When the model is calibrated using the current market concentration levels in the Turkish electricity market, the two instruments generate nearly the same outcomes.