June 2022

We are delighted to share three forthcoming publications that deal with energy issues in the context of the pandemic. This research deepens our understanding of the mechanisms through which lockdowns and movement restrictions affect energy consumption and associated carbon emissions. It further investigates the links between energy demand and economic activity (as measured by GDP, for example). And it discusses the lessons that electricity markets can provide to cope with security of supply issues such as the ones that arise during major shocks such as the pandemic. Our papers have been accepted at the European Economic Review, The Energy Journal, and Energy Policy.

Natalia Fabra, Aitor Lacuesta and Mateus Souza investigate “The implicit cost of carbon abatement during the COVID-19 pandemic” in an article published this month at the European Economic Review. The first step of the analysis was to predict what the (counterfactual) electricity demand in Spain would have been in case the COVID-19 pandemic had not happened. We employ highly flexible machine learning algorithms for this task, in order to obtain accurate hourly-level predictions. These predictions then serve as inputs for a power sector model which allows us to understand which power plants would have been dispatched in the counterfactual scenario. By comparing plants dispatched under realized and counterfactual electricity demand, we calculate that the carbon abatement attributable to the pandemic ranged between 3.9 and 4.1 Million Tons of CO2.

For carbon reductions in other sectors of the economy, we use data from the Carbon Monitor. Summing all sectors, we estimate that total carbon abatement in Spain reached 23 Million Tons of CO2 during 2020. However, this came at a great cost, even if we do not consider the health damages and human loss due to the pandemic. Using projections from the Bank of Spain, we find that the Spanish GDP loss in 2020 was 169.37 Billion Euros. Comparing this figure to the emissions avoided results in an implicit cost of carbon of 7319 Euro/Ton. We conclude the paper with simulations showing that the abatement observed in the power sector could have been achieved at a much lower cost by investing in renewables. For that case, the implicit cost would range between 60-65 Euro/Ton of CO2.

Paper available here.

We provide more insight about the mechanisms through which Spanish electricity demand reduced during the pandemic in a paper forthcoming at The Energy Journal: “Firms and Households during the Pandemic: What do we learn from their electricity consumption?” This was a joint study by Natalia Fabra and a team of researchers from the Bank of Spain: Olympia Bover, Sandra García-Uribe, Aitor Lacuesta, and Roberto Ramos. The paper starts by laying out how Spanish grid-level electricity demand data can be decomposed into firms’ demand versus households’ demand. The first insight from this exercise is that households’ consumption increased due to lockdowns and movement restrictions, while firms’ consumption substantially decreased. Since firms represent a larger portion of the market, the net effect was of a strong decrease in demand. By plotting the demand figures against GDP growth rates, the authors arrive at another key insight: economic activity is better captured by firms’ electricity consumption, such that using total electricity consumption would under-estimate the severity of the economic impacts of the pandemic. Finally, the study provides evidence of substantial changes in the hourly patterns of electricity consumption, which differ across firms and households. For example, the pandemic was associated with large declines in electricity consumption by firms during working times, which are paralleled by simultaneous increases in households’ electricity consumption.

Paper available here.

In “Learning from Electricity Markets: How to Design a Resilience Strategy“, forthcoming at Energy Policy, Natalia Fabra, Massimo Motta and Martin Peitz argue that the economics of electricity capacity mechanisms provides valuable lessons for the provision of essential goods during crises, which need to be complemented with other elements aimed at mitigating their causes and impacts. The pandemic and post-pandemic times have demonstrated that preparing for global shocks requires the quick availability of some essential goods and services, including energy. Private incentives are typically insufficient for an economy to be prepared for rare events with large negative impacts. Instead, they argue that governments and preferably supranational institutions should implement mechanisms that make sure that prevention, detection and mitigation measures are taken.

Paper available here.

We are excited to announce three new accepted papers from our team’s work on renewable energies. These are forthcoming at The Economic Journal, the American Economic Journal: Economic Policy, and the Journal of the Association of Environmental and Resource Economists. These papers deal with a variety of issues regarding the expansion of renewable energies and accompanying support policies. First, the functioning of future wholesale electricity markets in cases where they are dominated by renewable energies. Second, the quantification of the effects of renewable energy subsidies regarding pricing incentives and market power. Third, the effect of uniform subsidies on the allocation of solar photovoltaic plants. These policies are widely used to support the deployment of renewable energies and thus our research directly contributes to the debate on optimal policy design.

In “Auctions with Privately Known Capacities”, forthcoming at The Economic Journal, Natalia Fabra and Gerard Llobet assess in a theoretical model bidding equilibria and market outcomes in renewables-dominated electricity markets. A key feature of the model is that the availability of renewable energy capacity is random and it is private information. The results show that private information on capacities changes the nature of the equilibrium as compared to the case when private information is on costs (or valuations), a typical assumption in the standard electricity market models. Additionally, the authors show that the uniform-price and discriminatory auctions are not revenue equivalent, in contrast to when costs are independently drawn.

Paper available here.

In “Market Power and Price Exposure: Learning from Changes in Renewables Regulation”, forthcoming at the American Economic Journal: Economic Policy, Natalia Fabra and Imelda, study how RE technologies affect firms’ pricing incentives in wholesale electricity markets. In particular, the authors analyze whether renewable energies depress electricity market prices, and how this effect depends on their degree of exposure to fluctuations in market prices. The paper develops a theoretical model to show that fixed market prices, such as feed-in tariffs, are relatively more effective at curbing market power of dominant firms that own large shares of renewable capacity. The authors test for the main theoretical predictions empirically using detailed data from the Spanish electricity market and confirm that a switch from full price exposure to fixed prices caused a 2-4% reduction in the average price-cost markup.

Paper available here.

In “(Mis)allocation of Renewable Energy Sources”, forthcoming at the Journal of the Association of Environmental and Resource Economists, Stefan Lamp and Mario Samano study feed-in tariffs as a form of uniform policy instrument in case of solar photovoltaic installations in Germany. The authors estimate the dispersion of marginal benefits from solar production and compute the social and private benefits from optimal reallocations of solar installations keeping total capacity fixed. They find that a reallocation of solar, in line with the marginal benefits, would lead to substantial gains compared to the status quo, especially if transmission capacity between regions was considered. Overall, the paper puts in perspective the social costs of nationwide policies that do not offer heterogeneous incentives.

Paper available here.