Coupled energy economic model framework for analyzing Swiss electricity markets in changing policy environments

Energy policy needs to rely on the proper understanding of the interactions between policy instruments, consumer preferences, investment behavior, market structure, electricity supply, and the wider policy environment. This asks for appropriate modeling tools, able to represent precisely electricity supply options, model all types of energy and climate policies, as well as the reactions of the rest of the economy. Chapter 2 describes the ELECTRA-CH framework, developed to analyze electricity markets in Switzerland. This framework is composed of two component models: (1) a dynamic electricity supply model, CROSSTEM-CH, and (2) a dynamic computable general equilibrium (CGE) model of the Swiss economy, GENESwIS. The two models are coupled through an iterative soft link. Electricity market liberalization is altering pricing mechanisms in wholesale electricity markets, and thus the links between generation costs and user prices. This will affect the effectiveness of climate and energy policies. Models used to simulate such policies must be responsive to pricing rules. Chapter 3 shows how this can be done with the ELECTRA-CH framework and simulates a tightening of climate and energy policies. In the coupling procedure, the link between wholesale electricity prices (top-down) and generation costs (bottom-up) depends precisely on regulatory market assumptions: In the regulated market, wholesale electricity prices are "cost-plus", while they depend on marginal generation costs in the liberalized market. We show that, in Switzerland, an electricity tax is significantly more effective in reducing electricity demand in the liberalized than in the regulated market. Technology restrictions are still widely used in energy policy. Concerns about security, climate, or jobs preservation induce political quasi-selections of electricity generation technologies. Instruments inherited from regulation, technology restrictions may have different impacts on the economy when markets are largely liberalized. In chapter 4, we analyze (1) a balanced-trade scenario in which Switzerland’s annual electricity production must be equal to its consumption; and (2) a no-gas scenario that forbids gas-fired power plants, but accepts net electricity imports. For Switzerland, the prohibition of gas-fired power plants and relaxation of trade constraints lower average cost while increasing marginal cost. With marginal cost pricing in liberalized markets, this increases profits. Reduction in total system cost and increase in electricity price affect welfare in opposite ways. A pure bottom-up analysis would overestimate the benefits of technology restrictions. Our framework’s strength lies in the capacity of exploring interactions in a complex economic system, rather than in strict policy recommendations. Therefore, in this thesis, the emphasis is put on the understanding of mechanisms. At the end of this research, it has been shown that energy modelers must communicate and temper their results carefully. While much has been said about the impact of assumptions on substitution elasticities and exogenous costs projections on modeling results, this research adds to the awareness on the effects of market liberalization assumptions and choice of modeling framework on policy assessment.