Eirik Schrder Amunadsen

In this article we present a stylized model for optimal management of an unconfined groundwater resource when the threat of drought exists. The drought is modeled as a stochastic event that hits at an uncertain date and two benchmark management policies are investigated: (a) A policy of optimal dynamic management ignoring the threat of drought; and (b) an economically optimal policy that accounts for the threat of a drought. We show that the optimal predrought steady‐state equilibrium stock size of groundwater under policy b is larger than that under policy (a) Furthermore, we show that an increase in the probability of a drought gives rise to two counteracting effects: One in the direction of a larger predrought steady‐state equilibrium stock size (a recovery effect) and one in the direction of a lower predrought steady‐state equilibrium stock (an extinction effect). We find that the recovery effect dominates the extinction effect.Recommendations for Resource Managers:We analyze two groundwater extraction policies that can be used when a threat of drought exists: (a) Dynamic optimal management ignoring the threat of drought; and (b) dynamic optimal management taking the threat of drought into account. We show that the predrought steady‐state equilibrium stock size of water should be larger under the policy (b) than under policy (a). This conclusion has three implications for resource managers: Current groundwater management should take future extraction possibilities into account. A resource manager ought to take the threat of drought into account in groundwater management. A buffer stock of water should be built‐up before the drought to be drawn upon during the event.

We formulate a long run model with black, green and white certificate markets that function in conjunction with an electricity market. The markets function well together in the sense that a common equilibrium solution exists, where all targets are satisfied (e.g., the share of green electricity and share of energy saving/efficiency increase). The equilibrium solution adapts to changing targets but it is, in general, impossible to tell whether this will lead to more, less, or unchanged consumption of “black,” “green” or “white” electricity. Hence, if the long run target is to expand the capacity of green electricity generation and energy savings to certain given levels, then these markets may not be the best to use. To obtain clear results, specific parameter values and functional forms are needed. An example based on Norwegian data is provided. In addition, gains and losses in terms of consumers’ and producers’ surpluses are calculated.

A market for tradable green certificates (TGCs) is strongly interwoven in the electricity market in that the producers of green electricity are also the suppliers of TGCs. Therefore, strategic interaction may result. We formulate an analytic equilibrium model for simultaneously functioning electricity and TGC markets, and focus on the role of market power (i.e., Stackelberg leadership). One result is that a certificate system faced with market power may collapse into a system of per-unit subsidies. Also, the model shows that TGCs may be an imprecise instrument for regulating the generation of green electricity.

Worldwide groundwater is a common-pool resource that is potentially subject to the tragedy of the commons if water extraction is not adequately regulated. In developing countries the regulatory infrastructure is often too weak to allow detailed monitoring of individual groundwater extraction. For this reason, classical public intervention instruments, such as consumption fees or tradable quotas, are infeasible. Here we present a theoretical foundation for a new public regulatory instrument that can potentially generate the same efficiency-inducing incentives as fees and tradable quotas, but without their information and monitoring requirements. The instrument we propose is a tax based on aggregate extraction rather than on individual extraction measures.

The purpose of this study is to elucidate under which circumstances, how, and to what extent market power on a Tradable Green Certificates (TGC) market can be used to affect an entire electricity market. There are basically two reasons for being concerned with this. One is that a small number of companies may have exclusive access to first rate sites for wind power generation. The other is that withdrawal of a small number of TGCs implies a multiple reduction of electricity consumption, with corresponding increases of end user prices. Wefor-mulate both an analytical model to investigate economic principles and a numerical model based on that to investigate the Swedish TGC market operating in a setting of a common Nordic electricity market. The analysis shows that Swedish producers may exercise market power using the TGC-market but that this problem will be eliminated by opening the TGC-market for other Nordic countries.

System reliability is a key aspect of electricity supply, and the ability to maintain system reliability thus is an important aspect of a liberalised electricity market. But system reliability can be ensured only if there is sufficient operating reserve capacity at all times. In a liberalised electricity market the provision of operating reserve capacity is a matter of incentives that should be formulated on basic principles of economic behaviour. The Nordic electricity market, comprising the integrated Danish, Finnish, Norwegian, and Swedish electricity markets, has worked well from a system reliability point of view. A key factor behind this favourable outcome is that the incentives for keeping sufficient operating reserve capacity have been strong enough. The reason for this is an adequate institutional design. More precisely the set of markets that is commonly called “the electricity market” includes both regulation and capacity markets, and rules and regulations are such that these markets are well-functioning.