IDEAS home Printed from https://ideas.repec.org/a/eee/energy/v239y2022ipds0360544221025536.html
   My bibliography  Save this article

Impact of heat price regulation on the optimal district heating production mix and its policy implications

Author

Listed:
  • Oh, Saesin
  • Kim, Sang-Kee

Abstract

The use of district heating systems consisting of a combined heat and power (CHP) and a heat only boiler (HOB) is on the rise in South Korea. In this context, monopolistic district heating providers optimise cogeneration capacity composition to maximise their profits under price regulation. Building upon Joskow and Jones (1983), this study develops a theoretical framework to investigate the role of price regulation on the optimal capacity composition of a district heating system for a regional monopolist. Assuming varying heat demand, wherein the maximum heat load may exceed CHP capacity, the effects of price-cap and rate of return regulations on the optimal mix of the district heating system are examined and compared. The results show that the heat production mix is optimal for price-cap regulation. In contrast, the rate of return regulation hinders the monopolist's incentive to reduce costs. Finally, in case of internalising the environmental benefits of cogeneration, the optimal CHP size in the heat production mix should be increased; consequently, the energy efficiency for producing heat and electricity is likely to improve. This study, therefore, has far-reaching implications for policymakers and practitioners alike in terms of addressing the dual goals of energy efficiency and economic efficiency.

Suggested Citation

  • Oh, Saesin & Kim, Sang-Kee, 2022. "Impact of heat price regulation on the optimal district heating production mix and its policy implications," Energy, Elsevier, vol. 239(PD).
    • Handle: RePEc:eee:energy:v:239:y:2022:i:pd:s0360544221025536
    DOI: 10.1016/j.energy.2021.122305
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0360544221025536
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.energy.2021.122305?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Wissner, Matthias, 2014. "Regulation of district-heating systems," Utilities Policy, Elsevier, vol. 31(C), pages 63-73.
    2. Paul L. Joskow & Donald R. Jones, 1983. "The Simple Economics of Industrial Cogeneration," The Energy Journal, , vol. 4(1), pages 1-22, January.
    3. Kozlova, Mariia & Fleten, Stein-Erik & Hagspiel, Verena, 2019. "Investment timing and capacity choice under rate-of-return regulation for renewable energy support," Energy, Elsevier, vol. 174(C), pages 591-601.
    4. Averfalk, Helge & Ingvarsson, Paul & Persson, Urban & Gong, Mei & Werner, Sven, 2017. "Large heat pumps in Swedish district heating systems," Renewable and Sustainable Energy Reviews, Elsevier, vol. 79(C), pages 1275-1284.
    5. Kumbartzky, Nadine & Schacht, Matthias & Schulz, Katrin & Werners, Brigitte, 2017. "Optimal operation of a CHP plant participating in the German electricity balancing and day-ahead spot market," European Journal of Operational Research, Elsevier, vol. 261(1), pages 390-404.
    6. Kristo Helin & Behnam Zakeri & Sanna Syri, 2018. "Is District Heating Combined Heat and Power at Risk in the Nordic Area?—An Electricity Market Perspective," Energies, MDPI, vol. 11(5), pages 1-19, May.
    7. Ronald R. Braeutigam & John C. Panzar, 1989. "Diversification Incentives under "Price-Based" and "Cost-Based" Regulation," RAND Journal of Economics, The RAND Corporation, vol. 20(3), pages 373-391, Autumn.
    8. Sanaye, Sepehr & Mohammadi Nasab, Amir, 2012. "Modeling and optimizing a CHP system for natural gas pressure reduction plant," Energy, Elsevier, vol. 40(1), pages 358-369.
    9. Comodi, Gabriele & Rossi, Mosè, 2016. "Energy versus economic effectiveness in CHP (combined heat and power) applications: Investigation on the critical role of commodities price, taxation and power grid mix efficiency," Energy, Elsevier, vol. 109(C), pages 124-136.
    10. Strachan, Neil & Farrell, Alexander, 2006. "Emissions from distributed vs. centralized generation: The importance of system performance," Energy Policy, Elsevier, vol. 34(17), pages 2677-2689, November.
    11. Blakemore, F. B. & Davies, C. & Jones, K., 1995. "Combined heat and power, economies of scale and option appraisal," Utilities Policy, Elsevier, vol. 5(3-4), pages 167-174.
    12. Kim, Hyo-Jin & Lim, Seul-Ye & Yoo, Seung-Hoon, 2017. "Is the Korean public willing to pay for a decentralized generation source? The case of natural gas-based combined heat and power," Energy Policy, Elsevier, vol. 102(C), pages 125-131.
    13. David Sibley, 1989. "Asymmetric Information, Incentives and Price-Cap Regulation," RAND Journal of Economics, The RAND Corporation, vol. 20(3), pages 392-404, Autumn.
    14. Gal, Nurit & Milstein, Irena & Tishler, Asher & Woo, C.K., 2017. "Fuel cost uncertainty, capacity investment and price in a competitive electricity market," Energy Economics, Elsevier, vol. 61(C), pages 233-240.
    15. Cabral, Luis M B & Riordan, Michael H, 1989. "Incentives for Cost Reduction under Price Cap Regulation," Journal of Regulatory Economics, Springer, vol. 1(2), pages 93-102, June.
    16. Li, Hailong & Sun, Qie & Zhang, Qi & Wallin, Fredrik, 2015. "A review of the pricing mechanisms for district heating systems," Renewable and Sustainable Energy Reviews, Elsevier, vol. 42(C), pages 56-65.
    17. Montserrat Viladrich-Grau, 2001. "Internalising externalities: are cogeneration subsidies high enough?," Documentos de Trabajo - Lan Gaiak Departamento de Economía - Universidad Pública de Navarra 0104, Departamento de Economía - Universidad Pública de Navarra.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Soltero, V.M. & Quirosa, Gonzalo & Peralta, M.E. & Chacartegui, Ricardo & Torres, Miguel, 2022. "A biomass universal district heating model for sustainability evaluation for geographical areas with early experience," Energy, Elsevier, vol. 242(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, in: Mark Armstrong & Robert Porter (ed.), Handbook of Industrial Organization, edition 1, volume 3, chapter 27, pages 1557-1700, Elsevier.
    2. Pavel Atănăsoae, 2018. "The Operating Strategies of Small-Scale Combined Heat and Power Plants in Liberalized Power Markets," Energies, MDPI, vol. 11(11), pages 1-16, November.
    3. Waters, II, W.G. & Tretheway, Michael W., 2000. "Labor Payouts, Productivity Measurement and the Price Cap Approach to Regulation," Journal of the Transportation Research Forum, Transportation Research Forum, vol. 39(1).
    4. Weisman, Dennis L., 2002. "Strategic sharing in regulatory regimes," Economics Letters, Elsevier, vol. 75(3), pages 361-367, May.
    5. Krouse, Clement G & Cabolis, Christos & Danger, Kenneth L & Carter, Tanja D & Riddle, Jon M & Ryan, Daniel J, 1999. "The Bell System Divestiture/Deregulation and the Efficiency of the Operating Companies," Journal of Law and Economics, University of Chicago Press, vol. 42(1), pages 61-87, April.
    6. William P. Rogerson, 1993. "Inter-temporal Cost Allocation and Managerial Investment Incentives," Discussion Papers 1060, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    7. Lake, Andrew & Rezaie, Behanz & Beyerlein, Steven, 2017. "Review of district heating and cooling systems for a sustainable future," Renewable and Sustainable Energy Reviews, Elsevier, vol. 67(C), pages 417-425.
    8. Ma, Zheng & Knotzer, Armin & Billanes, Joy Dalmacio & Jørgensen, Bo Nørregaard, 2020. "A literature review of energy flexibility in district heating with a survey of the stakeholders’ participation," Renewable and Sustainable Energy Reviews, Elsevier, vol. 123(C).
    9. Paul L. Joskow, 2014. "Incentive Regulation in Theory and Practice: Electricity Distribution and Transmission Networks," NBER Chapters, in: Economic Regulation and Its Reform: What Have We Learned?, pages 291-344, National Bureau of Economic Research, Inc.
    10. Jann T. Keller & Gerard H. Kuper & Machiel Mulder, 2020. "Competition under revenue-cap regulation with efficiency benchmarking: tariff related incentives for gas transmission system operators in merged markets," Journal of Regulatory Economics, Springer, vol. 58(2), pages 141-165, December.
    11. Liu, Wen & Klip, Diederik & Zappa, William & Jelles, Sytse & Kramer, Gert Jan & van den Broek, Machteld, 2019. "The marginal-cost pricing for a competitive wholesale district heating market: A case study in the Netherlands," Energy, Elsevier, vol. 189(C).
    12. Luigi Benfratello & Alberto Iozzi & Paola Valbonesi, 2009. "Technology and incentive regulation in the Italian motorways industry," Journal of Regulatory Economics, Springer, vol. 35(2), pages 201-221, April.
    13. Gao, Shuang & Jurasz, Jakub & Li, Hailong & Corsetti, Edoardo & Yan, Jinyue, 2022. "Potential benefits from participating in day-ahead and regulation markets for CHPs," Applied Energy, Elsevier, vol. 306(PA).
    14. Ingo Vogelsang, 1999. "Optimal Price Regulation for Natural and Legal Monopolies," Economía Mexicana NUEVA ÉPOCA, CIDE, División de Economía, vol. 0(1), pages 5-43, January-J.
    15. Wang, Jiawei & You, Shi & Zong, Yi & Cai, Hanmin & Træholt, Chresten & Dong, Zhao Yang, 2019. "Investigation of real-time flexibility of combined heat and power plants in district heating applications," Applied Energy, Elsevier, vol. 237(C), pages 196-209.
    16. Dennis L. Weisman, 2019. "The power of regulatory regimes reexamined," Journal of Regulatory Economics, Springer, vol. 56(2), pages 125-148, December.
    17. Boldrini, A. & Jiménez Navarro, J.P. & Crijns-Graus, W.H.J. & van den Broek, M.A., 2022. "The role of district heating systems to provide balancing services in the European Union," Renewable and Sustainable Energy Reviews, Elsevier, vol. 154(C).
    18. Weisman, Dennis L., 2002. "Is there 'Hope' for price cap regulation?," Information Economics and Policy, Elsevier, vol. 14(3), pages 349-370, September.
    19. Shamshirband, Shahaboddin & Petković, Dalibor & Enayatifar, Rasul & Hanan Abdullah, Abdul & Marković, Dušan & Lee, Malrey & Ahmad, Rodina, 2015. "Heat load prediction in district heating systems with adaptive neuro-fuzzy method," Renewable and Sustainable Energy Reviews, Elsevier, vol. 48(C), pages 760-767.
    20. Avdasheva, Svetlana & Orlova, Yulia, 2020. "Effects of long-term tariff regulation on investments under low credibility of rules: Rate-of-return and price cap in Russian electricity grids," Energy Policy, Elsevier, vol. 138(C).

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:energy:v:239:y:2022:i:pd:s0360544221025536. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.journals.elsevier.com/energy .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.