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Environmental Regulation

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Regulation of the Power Sector

Part of the book series: Power Systems ((POWSYS))

Abstract

In coincidence with the second wave of regulatory reforms of electricity markets (the reform of the reform), during the past decade the concern for the environmental impacts of electricity—clearly led by climate change– has also become widespread and will require a very demanding environmental and energy policy, reducing emissions and at the same time supporting the massive deployment of clean energy technologies (renewables, capture and storage of CO2, nuclear or biofuels, plus measures of energy efficiency and savings). We have seen that, in particular, this will require an almost complete decarbonisation of the power sector, which, on the other hand, will have to feed with clean electricity much of the transportation and the heating sectors. The implications for electricity regulation are staggering, as environmental concerns have become as prominent as efficiency and security of supply: regulatory support of the several types of clean technologies, while they might need it; an in-depth review of the existing pricing and incentive instruments for electricity generation so that they are adapted to the new technology mixes that can be anticipated; demand response and how energy efficiency and conservation could be encouraged; rethink system operation and network planning at transmission and distribution levels; review of network remuneration schemes and design of instruments to promote innovation in new technologies. These challenges are reviewed in the final chapter of this book.

Analysts may confuse things that are countable with the things which count.

John P. Holdren, 1980

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Notes

  1. 1.

    According to the weak sustainability, man-made capital can replace natural capital. At the other extreme, the strong sustainability view sustains that natural resources are irreplaceable.

  2. 2.

    One such assessment can be found in the Fourth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC) [25], which analyses the safe level of CO2 concentrations in the atmosphere.

  3. 3.

    Many research projects have been devoted to the assessment of the externalities of electricity production. See [15] or [35] for a summary.

  4. 4.

    Compared to other environmental regulation instruments. All environmental policies naturally entail certain administrative costs, which must be weighed against the environmental benefit they provide.

  5. 5.

    Note that, by increasing pollution from 75 to 100 units, firm A has reduced its cost by the area DFHG, while by reducing pollution from 75 down to 50, firm B has increased its cost by the area ABED. Since ABED and DIJG have the same area, the net saving in cost is IFHG.

  6. 6.

    Dynamic efficiency refers to the existence of long-term incentives for further reducing emissions. Including incentives for innovation in technologies or changes in behaviour.

  7. 7.

    In addition to this use for centralised internalisation, taxes may also be used to internalise directly a polluter’s external cost as a decentralised way to achieve the economically efficient level of emissions, as seen in Sect. 11.2. However, as noted there, this is not the usual approach because of the vast amount of information required. Although determining the emissions level for each facility is achievable, computing the external costs specifically for each facility is very complex because it depends on the distribution of the receptors of the damages.

  8. 8.

    This is not necessarily undesirable, as it allows the externality to be fully internalised.

  9. 9.

    In which case they resemble a standard, which only imposes costs on excess pollution.

  10. 10.

    Agents may be producers or consumers. Indeed, the decision about whether to impose the obligation on the former (upstream) or on the latter (downstream) may also have important consequences on the outcome, see e.g. [23].

  11. 11.

    This is important for pollutants such as SO2 or particulates, high concentrations of which may cause acute local or regional damage. It is irrelevant for global pollutants, such as carbon dioxide.

  12. 12.

    The endowment effect [27] refers to a situation in which firms or individuals place a higher value on goods given to them than on goods acquired through trade. It results in fewer transactions, as the seller values its goods (here the allowances) more than the buyer does.

  13. 13.

    That is, if allocation is continuously revised based on previous emission levels, therefore converting a fixed payment into a variable income.

  14. 14.

    This is the Regional Greenhouse Gas Initiative, see http://www.rggi.org/.

  15. 15.

    This result may change if banking is allowed.

  16. 16.

    Conversely, the regulator may also set a minimum price for the allowance, in order to provide more stability to the investors in clean technologies.

  17. 17.

    Or more predictable to investors, as with a minimum allowance price, for example.

  18. 18.

    As described in previous chapters, retailing and distribution are bundled in the vast majority of US states and open retail access is available only in a few states.

  19. 19.

    Note that in power systems under traditional cost-of-service regulation is possible to design and apply tariffs that are based on marginal costs. In this case the consumers would pay the same as under competitive market conditions. However, the generators would only receive their cost of service and there will be a surplus or a deficit, to be administered by the regulator as it sees convenient.

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Authors and Affiliations

  1. Instituto de Investigación Tecnológica, Universidad Pontificia Comillas, Alberto Aguilera 25, 28015, Madrid, Spain

    Pedro Linares, Carlos Batlle & Ignacio J. Pérez-Arriaga

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  1. Pedro Linares
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  2. Carlos Batlle
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Correspondence to Pedro Linares .

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  1. Universidad Pontificia Comillas, Instituto de Investigación Tecnológica, Alberto Aguilera 25, Madrid, Spain

    Ignacio J. Pérez-Arriaga

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Linares, P., Batlle, C., Pérez-Arriaga, I.J. (2013). Environmental Regulation. In: Pérez-Arriaga, I. (eds) Regulation of the Power Sector. Power Systems. Springer, London. https://doi.org/10.1007/978-1-4471-5034-3_11

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  • DOI: https://doi.org/10.1007/978-1-4471-5034-3_11

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