Environmentally damaging electricity trade

Abstract

Electricity trade across regions is often considered welfare enhancing. We show in this paper that this could be reconsidered if environmental externalities are taken into account. We consider two cases where trade is beneficial, before accounting for environmental damages: first, when two regions with the same technology display some demand heterogeneity; second when one region endowed with hydropower arbitrages with its "thermal" neighbor. Our results show that under reasonable demand and supply elasticities, trade comes with an additional environmental cost. This calls for integrating environmental externalities into market reforms when redesigning the electricity sector. Two North American applications illustrate our results: trade between Pennsylvania and New York, and trade between hydro-rich Quebec and New York.

Long-term contracting in hydro-thermal electricity generation: Welfare and environmental impact

“…As far as the fully general case is considered, the aforementioned condition is so intricate that it does not provide much intuition, and remains of scarce practical guidance. In a recent study, however, Billette de Villemeur and Pineau [4] show that this condition takes a particularly simple form when the hydro producer faces a competitive thermal fringe. In this situation, environmental problems are especially strong as thermal …rms do not contract output as to exert market power.…”

“…2 To be precise, the hydro share lies generally far below 50% of the overall power-generation mix, with a world average being about 16%: 3 Notwithstanding, this share is likely to play an important role in the functioning of electricity markets, due to the possibility of hydro-based units being able to freely allocate water across time periods. 4 This appears to be of utmost importance in contexts where demand and, hence, price vary over time.…”

“…3 Source: International Energy Agency [3]. 4 By contrast, total output cannot be adjusted. On hydro-dominated electricity markets see Rangel [15].…”

Turkey’s energy trade relations with Europe: The role of institutions and energy market

“…Many researchers emphasize the benefits of integrated electricity grids and cross-border power trade between jurisdictions in different parts of the world 30,31. In contrast, some researchers focus on the negative impacts of integrated electricity grids on the environment 32,33. Based on the economic benefits as accentuated in the literature, some well-established regional cooperation frameworks, regional agreements, and institutions encourage regional electricity trade schemes.…”

Integrating Thermal and Hydro Electricity Markets: Economic and Environmental Costs of not Harmonizing Pricing Rules

“…To make the results clearer, we will assume that Th (Ontario) holds no hydro storage capacity while H (Quebec) only produces hydropower with a storage capacity (we ignore multiyear water management aspects). We focus on this particular case in order to provide figures and to illustrate our theoretical results (see Billette de Villemeur and Pineau, 2010 and2012) and their multi-period extension. Our results are however of general interest, as the modeled situation is far from unique: British Columbia, another Canadian province with regulated hydropower and storage capacity, actively trades with Alberta, its competitive thermal neighbor, as well as with its Southern U.S. neighbors.…”