Contracting for the second best in dysfunctional electricity markets
- 174 Downloads
Power pools constitute a set of sometimes complex institutional arrangements for efficiency-enhancing coordination among power systems. In many developing countries, where such institutional arrangements can’t be established over the short term, there still can be scope for voluntary electricity-sharing agreements among power systems. Using a particular type of efficient risk-sharing model with no commitment we demonstrate that second-best coordination improvements can be achieved with low to moderate risks of participants leaving the agreement. In the absence of an impartial market operator who can observe production fluctuations in connected power systems, establishing quasi-markets for trading excess electricity helps to achieve some cooperation in mutually beneficial electricity sharing.
KeywordsElectricity trade Risk sharing arrangements Self-enforcing contracts
JEL ClassificationC73 L94 O13
The authors thank Javier Bustos-Salvagno, Deb Chattopadhyay, Avinash Dixit, Ethan Ligon, Romans Pancs, Paul Preckel, Vladimir Parail, Michael Pollitt, Michael Toman, two anonymous reviewers and the participants of the International Industrial Organization Annual Conference, the Royal Economic Society Annual Conference, and research seminars at the University of Alicante and the World Bank for their helpful suggestions and comments. Responsibility for the content of the paper is the authors’ alone and does not necessarily reflect the views of their institutions, or member countries of the World Bank. Financial support from the Australian Agency for International Development and from the Partnership for South Asia Regional Integration Programmatic Trust Fund is greatly acknowledged.
- Abdulkadiroglu, A. (2013). Trust, reciprocity, and favors in cooperative relationships. American Economic Journal: Microeconomics, 5(2), 213–259.Google Scholar
- Abdulkadiroglu, A., & Bagwell, K. (2012). The optimal chips mechanism in a model of favors. Working paper.Google Scholar
- Besant-Jones, J. E. (2006). Reforming power markets in developing countries: What have we learned? Energy and mining sector board discussion paper 19, The World Bank.Google Scholar
- Eberhard, A., Foster, V., Briceno-Garmendia, C., Ouedraogo, F., Camos, D., & Shkaratan, M. (2008). Underpowered: The state of the power sector in sub-Saharan Africa. Africa infrastructure country diagnostic background paper 6, The World Bank.Google Scholar
- Federal Energy Regulatory Commission. (2004). Cost ranges for the development and operation of a day one regional transmission organization. Staff report PL04-16-000.Google Scholar
- Fogelberg, S., & Lazarczyk, E. (2014). Strategic withholding through production failures. IFN working paper 1015, Research Institute of Industrial Economics.Google Scholar
- Foster, V., & Steinbuks, J. (2009). Paying the price for unreliable power supplies: In-house generation of electricity by firms in Africa. Policy research working paper 4913, The World Bank.Google Scholar
- Hauser, C., & Hopenhayn, H. (2008). Trading favors: Optimal exchange and forgiveness. Working paper, Collegio Carlo Alberto.Google Scholar
- Hertel, J. (2004). Efficient and sustainable risk sharing with adverse selection. Working paper, Princeton University.Google Scholar
- Joskow, P. (2008). Lessons learned from electricity market liberalization. The Energy Journal, 29(2), 9–42.Google Scholar
- Kalla, S. J. (2010). Essays in favor-trading. PhD thesis, University of Pennsylvania.Google Scholar
- Maurer, L. T. A., & Barroso, L. A. (2011). Electricity auctions: An overview of efficient practices. Technical report, The World Bank.Google Scholar
- Mbirimi, I. (2010). Regional energy security dynamics in Southern Africa: Electricity mixes in the context of global climate change mitigation pressures. Series on trade and energy security, policy report #5, International Institute for Sustainable Development.Google Scholar
- Mkhwanazi, X. (2003). Power sector development in Africa. Conference paper, NEPAD energy workshop, Senegal.Google Scholar
- Möbius, M. (2001). Trading favors. Unpublished manuscript.Google Scholar
- Mukherji, B., & Chaturvedi, S. (2013). India plan to export power to Bangladesh to benefit both sides. The Wall Street Journal. http://www.wsj.com/articles/SB10001424127887323308504579082412762128426.
- Mulder, M., & Schestalova, V. (2006). Costs and benefits of vertical separation of the energy distribution industry: The Dutch case. Competition and Regulation in Network Industries, 7, 197.Google Scholar
- Musaba, L. (2009). Energy trading in the SAPP, Retrieved from http://www.sapp.co.zw.
- Nayyar, S. (2009). Essays on repeated games. PhD thesis, Princeton University.Google Scholar
- Newbery, D. (2009). Refining market design. In J.-M. Glachant & F. Lvque (Eds.), Electricity reform in Europe: Towards a single energy market (Vol. 2, pp. 35–64). Cheltenham: Edward Elgar Publishing.Google Scholar
- Olszewski, W., & Safronov, M. (2012). Chip strategies in repeated games with incomplete information. Working paper, Department of Economics, Northwestern University.Google Scholar
- Ravinder, M., Chattopadhyay, D., & Bazilian, M. (2016). Power politics and energy trade. http://www.theigc.org/blog/power-politics-and-energy-trade.
- Reinstein, D., Mateos, A., Brugman, A., Berman, L., & Johnson, T. (2011). Regional power integration: Structural and regulatory challenges. Energy sector management assistance program report 58934 - LAC, The World Bank.Google Scholar
- Schiff, M., & Winters, L. A. (2002). Regional cooperation, and the role of international organizations and regional integration. Policy research working paper 2872, The World Bank.Google Scholar
- Singh, A., Jamasb, T., Nepal, R., & Toman, M. (2015). Cross-border electricity cooperation in South Asia. Policy research working paper 7328, The World Bank.Google Scholar
- Sioshansi, F. P. (2008). Competitive electricity markets: Design, implementation performance. Amsterdam: Elsevier.Google Scholar
- Thomas, J., & Worrall, T. (2014). Dynamic relational contracts under complete information. Unpublished Manuscript. http://www.timworrall.com/wpapers/drcci.pdf
- Timilsina, G. R., Toman, M., Karacsonyi, J., & de Tena Diego, L. (2015). How much could South Asia benefit from regional electricity cooperation and trade? Policy research working paper 7341, The World Bank.Google Scholar
- Woolfrey, S. (2016). The political economy of regional integration in Africa. Common Market for Eastern and South Africa (COMESA) report, European Centre for Development Policy Management.Google Scholar