Measuring the effects of environmental policies on electricity markets risk

This paper studies how environmental policies, such as renewable portfolio standards (RPS) and carbon taxes, might contribute to reducing risk exposure in the electricity generation sector. We illustrate this effect by first computing long-term market equilibria of the Chilean generation sector for the year 2035 using a risk-averse planning model, considering uncertainty of hydrological scenarios and fossil fuel prices as well as distinct levels of risk aversion, but assuming no environmental policies in place. We then compare these risk-averse equilibria to generation portfolios obtained by imposing several levels of RPS and carbon taxes in a market with risk-neutral firms, separately. Our results show that the implementation of both policies can provide incentives for investments in portfolios of generation technologies that limit the risk exposure of the system, particularly when high levels of RPS (35%) or high carbon taxes (35 $/tonCO₂) are applied. However, we find that in the case of a hydrothermal system, the resulting market equilibria under RPS policies yield expected generation cost and risk levels (i.e. standard deviation of costs) that are more similar to the efficient portfolios determined using a risk-averse planning model than the ones we find under the carbon tax.