Decarbonization of energy systems under risk

Abstract

This thesis presents four papers exploring the role of investment risk in the decarbonization of energy systems. The first three papers are motivated by the question of whether electricity markets send investment signals that are aligned with the goal of decarbonization. Wholesale electricity prices in principle incentivize economically efficient investment decisions, which implies that, when combined with adequate carbon pricing, they can lead to a socially optimal mix of low-carbon technologies. However, it is now being discussed whether and, if so, how the investment mix may be distorted by the incompleteness of long-term contracting in liberalized power markets. This raises the questions of how market incompleteness impacts the risk exposure of investments in different technologies - including fossil fuel power plants, variable renewable technologies, and energy storage - and what consequences this has for the future power system capacity mix and overall emissions. Paper 1 introduces a new engineering-economic power system model to shed light on these questions. This model casts the investment and operating decisions in a power system as a tractable risk-averse equilibrium problem. Exploratory experiments with this model suggest that incomplete risk trading may result in sub-optimally little clean energy investment and sub-optimally high emissions. Paper 2 applies the newly developed power system model to explore the implications of missing risk markets for the performance of existing climate policies, including wind and solar investment tax credits and carbon taxes. The analysis in this paper strengthens the case for considering the completeness of risk markets in cost-benefit analyses of climate policies. Paper 3 develops a new game theoretic power system model that captures how optimal climate policy choices depend on electricity market characteristics. The model takes a bilevel programming approach to endogenize the optimal choices of policies such as renewable subsidies, which are treated as exogenous in traditional power system models. This model enables an analysis of how the design and relative merits of commonly-used climate policies - such as renewable subsidies and carbon pricing - depend on the completeness of risk trading. Paper 4 considers the impacts of risk on the timing of private-sector investments in electric vehicle charging stations. By leveraging a real options model of charging investment, the paper explores how investment timing is impacted by alternative policy options.