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Seminar by Afzal Siddiqui

Are Targets for Renewable Portfolio Standards Too Low? The Impact of Market Structure on Energy Policy

Afzal Siddiqui – Senior Lecturer

Department of Statistical Science; University College London

Friday, November 6, 2015; 11:00 am – 12:00 pm

210E Baker Systems; 1971 Neil Avenue

In order to limit climate change from greenhouse gas emissions, governments have introduced renewable portfolio standards (RPS) to incentivise renewable energy production. While the response of industry to exogenous RPS targets has been addressed in the literature, setting RPS targets from a policymaker’s perspective has remained an open question. Using a bi-level model, we prove that the optimal RPS target for a perfectly competitive electricity industry is higher than that for a benchmark centrally planned one. Allowing for market power by the non-renewable energy sector within a deregulated industry lowers the RPS target vis-à-vis perfect competition. Moreover, to our surprise, social welfare under perfect competition with RPS is lower than that when the non-renewable energy sector exercises market power. In effect, by subsidising renewable energy and taxing the non-renewable sector, RPS represents an economic distortion that over-compensates damage from emissions. Thus, perfect competition with RPS results in “too much” renewable energy output, whereas the market power of the non-renewable energy sector mitigates this distortion, albeit at the cost of lower consumer surplus and higher emissions. Hence, ignoring the interaction between RPS requirements and the market structure could lead to sub-optimal RPS targets and substantial welfare losses.

Afzal Siddiqui is a Senior Lecturer in the Department of Statistical Science at University College London (UCL). Previously, he was a Lecturer in Statistics at UCL (2005-2010) and a College Lecturer in the Department of Banking and Finance at University College Dublin. After having completed his Ph.D. in Industrial Engineering and Operations Research from the University of California at Berkeley in 2002, Afzal served as a Visiting Assistant Professor in the Department of Industrial Engineering and Operations Research at UC Berkeley (2002) and a Visiting Post-doctoral Researcher at the Ernest Orlando Lawrence Berkeley National Laboratory (2002-2003). In addition, he is a Professor (20% time) in the Department of Computer and Systems Sciences at Stockholm University and a Visiting Professor in the Systems Analysis Laboratory at Aalto University. Afzal’s research interests are in energy economics, specifically the application of financial and operational research methods for making decisions under uncertainty and competition.

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