THREE ESSAYS IN ENERGY ECONOMICS

Abstract

Two critical steps for reaching lower carbon economies are associated with the performance of electricity markets. First, at the generation level, it is essential to advance in the decarbonization of the electricity mix. Second, at the consumption level, it is fundamental to incentivize a shift from fossil fuels to electricity use within the transportation, industrial, commercial, and residential sectors. Also, the study of these markets in developing economies is essential because nearly all the growth in energy demand is forecasted to come from those countries (Wolfram et al. (2012)). My dissertation consists of three essays related to electricity provision in developing countries.

The first essay is about demand-side management programs among poor households in Colombia. I evaluate how low-income households in a major Colombian city respond to an unexpected hybrid price/non-price energy-saving policy. Using hourly household electricity consumption data I find that, on average, households reduce electricity consumption by 4.5% as a result of the policy. It is striking is that even low-income households, who consume relatively small amounts of electricity, respond to energy-saving policies and can engage in conservation behaviors in the short term, helping the electricity sector avoid blackouts. The effect is stronger the higher the household pre-treatment electricity consumption levels and smaller among poorer households. However, the heterogeneity in terms of income level vanishes once I control for household pre-program electricity consumption levels.

The second one is related to the cost of regulation in wholesale electricity markets and provides evidence for the Chilean market. The paper concerns the side effects of price controls in regulated industries: I unveiled inefficiencies associated with cost-based offer prices -offers set administratively- in wholesale electricity markets. Using variation in the competitive environment introduced by a major transmission interconnection between the Southern and the Northern regions in Chile, I show that with the commissioning of the new transmission line, the difference in the average cost-based offer prices between coal generating units of both areas increased by 20\%. This finding is puzzling because theory suggests that an electricity interconnection should increase the extent of competition faced by electricity suppliers at both ends of it, which should imply that their offer prices tend to converge. This unexpected result directly results from manipulating the main cost parameter firms report to the regulator: the coal price. I argue that what explains this behavior is the existence of a regulatory distortion inherent to cost-based offer price wholesale market designs that compensate generating units that operate with losses, such that they will always receive a payment for the electricity they sell at least equal to their cost-based offer price, which, under certain circumstances, lead them to inflate their reported cost parameters. The adverse effect of this regulation increases in an abundance of renewable-based electricity, such as solar or wind-based ones, as is the case of the Chilean electricity market. The main implication on market outcomes associated with the opportunistic behavior I found, compare to a situation in which the coal price is imputed by the regulator, is an increase of the wholesale market price of 2.9% for the six months after the interconnection. The increase in the wholesale market price would imply a transfer from consumers to producers of US$ 88 MM in a period of one year, equivalent to 2.9% of the total revenue of the system and 6.7% of the total cost of generation.

The third essay is about the role of governance and management in Latin American and Caribbean countries electric utilities' performance. The paper empirically analyzes the role of governance and management of electricity distribution utilities in the quality of the service provided and their profitability. To measure the quality of service, we use a customer satisfaction index and two standard measures of electricity service interruption -SAIDI and SAIFI. For the profitability variables, the analysis is made on the EBITDA and assets rate of return. Using data from 17 Latin America and Caribbean countries and 150 electricity distribution utilities, we found that establishing instances of governance and managements controls, investing in their commercial strategy, and improving the technical and operational capacity to reduce losses will result in a better service for their customers and higher returns for their investors. Moreover, the paper found that governance and management variables explain, in a not lesser percentage, the high heterogeneity observed among companies in their quality-of-service and profitability indicators.