Electricity in the GTAP model Tony Wiskich National CGE Workshop 2013

1. Electricity in the GTAP modelTony WiskichNational CGE Workshop 2013

2. Background • Australian Treasury is interested in electricity modelling in an economy-wide framework • It has used: • detailed consultant’s electricity model and • embedded Constant Elasticity of Substitution (CET) production nest between generation technologies. • Interested in macroeconomic impacts of adjustment in electricity generation

3. Motivation • NOT to replace detailed bottom-up electricity model • Provide some insight using an alternative approach to a CET nest structure based on a competitive electricity market • Provide some insight into costs of adjustment

4. Model basics • GTAP model made recursive through simple capital/investment dynamic • Single region, 8 sectors including electricity

7. Electricity Structure Assumptions • Profit + Fixed + Variable Costs • Profit = Capital Cost (28%) • Fixed = Labour Cost (13%) • Variable = Intermediate (59%) (+ TAX) • Generators operate in a competitive electricity market similar to Australia

8. Base case assumptions • Baseload, Mid and Peak generation • Same rate of return on investment between generation types & other sectors • Same Fixed Cost per MW (MegaWatt) Capacity • Same Variable costs structure • Small load shedding period (demand > supply) • Approx 3 hours per year

9. Load duration curve Load 2M M Duration 1

10. Capacity Peak Mid Base Duration 1

11. Capacity Peak Mid Base Duration 1

12. Price = Marginal Cost Price CAP P_Peak P_Mid P_Base Peak Mid Base Time 1

13. Price = Marginal Cost Price CAP P_Peak P_Mid Base Capital + Fixed (Labour) Costs P_Base Base Variable (Intermediate) Costs Peak Mid Base Time 1

14. Base case assumptions/numbers

15. Policy shock • Introduce electricity output tax on Baseload electricity generation • Two rates, initial Baseload variable cost = 1 • Fast: incremental tax increase of 0.05 per year • Mobile capital (consider immobile later)

18. Back-of-envelope – ΔPrice • CES: Elasticity 10, approx 80% Base share • Price inc ~ 0.2*((1+0.8/0.2)10/9-1)-0.8 ~ 20% • ELY: Price inc ~ Base_varshare_as_marg_gen* (Mid_varprice/Base_varprice-1) ~14% * 0.5 ~ 7%

20. Back-of-envelope - ΔGDP • CES: GDP impact ~ price_inc*ely_cost/GDP*dynamic_adj_factor ~ 20%* 2/56 * 1.5 ~ 1.1% • ELY: Price inc: (extra_var_cost – cap_savings)/GDP*dynamic_adj_factor ~ (0.9*0.5 – 0.5*2/3)/GDP*dyn ~ 0.12/56*1.5 ~ 0.3%

23. Fixed capital in generation • Baseload Depreciation – 30 years to vanish • No limit on capital increase (build in single period) • Capital is decommissioned if profits < 0 Slow tax introduction • From 0.05 to 0.02 increment per year

30. Summing up • Competitive electricity market model can be done and has different dynamics/costs to CET • Baseload-Mid substitution not Peak • Fixing capital: Adjustment cost depends on speed of tax introduction • Inefficient capital allocation, merit order switching • Capital decommissioning

31. Possible further work • Simple international analysis • based on projected capital/fixed/variable costs • Compare economic costs with CET • Figure out way of adjusting CET implementation to approximate detailed model • Intermittent generation

32. Extra slidesTony Wiskich2013 conference