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Optimal Regulation of Electricity Provision with Rolling and Systemic Blackouts

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  • Bobtcheff, Catherine
  • De Donder, Philippe
  • Salanié, François

Abstract

We set up a static model of electricity provision in which delivery to consumers is only imperfectly reliable. Blackouts can be either rolling or systemic; in both cases a price cap has to be imposed on the wholesale market. We characterize optimal allocations and we show that for any given value of the price cap on the wholesale market, one can decentralize these allocations thanks to two types of regulatory instruments: a retail tax, and capacity subsidies. Some properties follow. If demand is affected by multiplicative shocks only, capacity subsidies are exactly financed by the revenues from the retail tax. If moreover the distribution of systemic blackouts is exogenous, a price cap is sufficient, provided it is set at the value of lost load. In all other cases, all instruments are needed, and capacity subsidies need to be differentiated, based on the correlation between available capacity and its social value.

Suggested Citation

  • Bobtcheff, Catherine & De Donder, Philippe & Salanié, François, 2024. "Optimal Regulation of Electricity Provision with Rolling and Systemic Blackouts," CEPR Discussion Papers 19318, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:19318
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    References listed on IDEAS

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    1. Frank Wolak, 2013. "Economic and Political Constraints on the Demand-Side of Electricity Industry Re-structuring Processes," Review of Economics and Institutions, Università di Perugia, vol. 4(1).
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    More about this item

    Keywords

    Electricity; Renewables; Climate change;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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