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THE TOULOUSE SCHOOL OF ECONOMICS MAGAZINE
Living economics
#
14
SUMMER
2017
Specia� issue
ENERGY
CHANGING THE BALANCE OF POWER
Doh-Shin Jeon Matt Taddy on Isis Durrmeyer Philippe Trainar
on Google's the potential of on taxing the car on the evolution
monopoly economic AI industry of risk
Editors' message #
14 Contents
France will soon emerge from a double election campaign News & events
as it elected its new president, Emmanuel Macron, and
4 Appointments & prizes
will elect its members of parliament. More ballot boxes
are on the horison, with general and federal elections in 5 Save the date
the coming months in the UK and Germany, to name but 6 Highlight: elections
a few. As these milestones pass, Europe will hopefully
be able to move forward with shaping the future of the
continent and its important economic interactions with the
rest of the world. In this context, the role of economists
�inkers
and their analysis are more important than ever. Via TSE
Mag, we try to bring you an idea of how the academic
Specia� issue
contributions of the TSE community are shaping today’s
major policy debates. ENERGY 8 The true potential of big
data will be economic AI
Matt Taddy
Some of you will be reading these pages en exclusivité from our TSE Forum in
Paris early June. To celebrate our 10th anniversary, the event is a bumper “double” 9 Is Google abusing
edition featuring two of our most active research areas, the economics of energy 14 The issues its power?
and the economics of the digital era. Our aim in holding the Forum is to connect Doh-Shin Jeon
Changing the balance of power
research to policy, gathering top economic practitioners and internationally
10 Tax rebates in the car
renowned academics to exchange ideas and analysis, and develop solutions The experts
16 Claude Crampes on European energy policy
industry
together. May we take this opportunity to extend a heartfelt thank you to all "The economic analysis of
18 Stefan Ambec on intermittent electricity Isis Durrmeyer
our impressive speakers at the event. energy challenges is crucial
to understand the issues and 20 The figures
develop new policies and
Actors
The special dossier of this magazine is dedicated to energy and the challenges
we face in terms of market organisation, storage, and green transition. It’s an regulatory tools to transition The research
important and vast topic; effective, sustainable energy transition and determined, into a better production system" 21 Stefan Lamp on projection bias
22 Estelle Cantillon on competitive bidding
26 Finding a port in the storm
united global action to avert the dangers of climate change rank among the most
23 Georgios Petropoulos and Bert Willems Philippe Trainar, SCOR Chief
important areas of public decision-making in current and coming years. Via this
on network access Economist
special issue we bring you just a few examples of how and where our energy
24 Giulia Pavan on alternative fuel supply
economists are contributing to energy policy and debate. We are delighted also
to have viewpoints from leading economists in the field, and contributions from 25 The poll
major market players. Campus
We hope you enjoy reading the issue, and wish you a happy summer. 28 The art of the nudge
30 Training energy
Best regards,
& climate experts
Ulrich Hege, TSE Director
Trimestrial magazine of Toulouse School of Economics
Jean Tirole, TSE Chairman 21, allée de Brienne - 31 015 Toulouse Cedex 6 - FRANCE - Tél. : +33 (0)5 67 73 27 68
Publication Director: Ulrich Hege - Managing Editor: Joël Echevarria
Editor in chief: Jennifer Stephenson - Production Manager: Jean-Baptiste Grossetti
with the help of: Tiffany Naylor - Claire Navarro - James Nash
Graphic design and layout: Yapak
Pictures: ©Studio Tchiz, ©Fotolia, ©Shutterstock, ©Istock, ©BNP Paribas
1000 magazines printed on offset paper from renewable forests. ISSN: 2554-3253
tse-fr.eu 3
News & events
Appointments & prizes Jean Tirole’s
Save the date
book goes global
“Économie du bien commun” (Economics
Bruno Biais for the Common Good) was published
in 2016 in France and sold more than
13-14
JUNE
wins Best Paper award 80,000 copies, an excellent perfor- 2017
Congratulations to Bruno Biais mance for an economics book. It is
(TSE-CNRS-CRM), Florian Heider currently being translated to English,
and Marie Hoerova (European Spanish, Italian and Korean and will
Central Bank) who were awarded be published internationally in the
the Best Paper 2017 prize for their coming months. Workshop on explaining
article "Risk-sharing or risk-taking? institutional change in history
Counterparty-risk, incentives and margins" Toulouse
by the Europlace Institute of Finance at the
10th Risks Forum. Europlace is a network
that promotes international excellence in
economics and finance.
20
JUNE
2017
Marc Ivaldi English Spanish Italian
joins Toulouse metro project I.O. student
TSE-EHESS researcher Marc Ivaldi has workshop
been appointed member of the scienti- Toulouse
fic council of Toulouse’s new metro line
Astrid Hopfensitz
project. As a specialist in transport eco-
nomics, Marc will provide expert analysis receives a CNRS medal
Researchers
of the socioeconomic impact of the new Congratulations to Astrid Hopfensitz and students
system, as well as advice on the project’s (TSE-UTC) who has won the 2017 CNRS welcome top CEOs 16–17
financing and sustainability. bronze medal for her pioneering re-
The French news outlet La Tribune regularly NOVEMBER
search in experimental economics. Her
organises high-level events featuring CEOs 2017
research uses economic experiments
from leading companies. In May, Christian
and psychological methods for mea-
Scherer and Frédéric Mazzella, the CEOs
suring emotions and character traits.
of ATR and BlaBlaCar, came to Toulouse
She is one of 40 researchers awarded
to answer the questions of local economic
this year. The CNRS bronze medals are
leaders and exchange with TSE researchers
Workshop on economic
given to young, promising researchers analysis of environmental
Frederic Cherbonnier and Jean-François
who demonstrate excellent academic food policies
Bonnefon. TSE students also participated
achievements and are an encourage- Toulouse
in the exchanges and asked some of the
ment to reach even higher standards.
most relevant questions. These two events
are the first of many others this year and in
2018, allowing TSE faculty and CEOs to in-
More information on teract on tomorrow's issues. Events by invitation only:
tse-fr.e�/people tse-fr.e�/events
4 tse-fr.eu tse-fr.eu 5
Highlight
ELECTION TIME
Do we vote the right way? THE FIRST ROUND OF THE 2017 FRENCH PRESIDENTIAL ELECTION ELECTORAL SYSTEMS ILLUSTRATED
3 THEORETICAL CANDIDATES
ranked by voters as follow:
A
t a TSE outreach event in Toulouse on 3 May, between the two rounds of preference, electing candidates able 1st 2nd 3rd
of the highly debated French presidential election, our political to combine strong first-choice support
science experts Karine Van der Straeten and Michel Le Breton dis- with the ability to earn second and third- 40% A B C
cussed voting methods around the world: how do systems differ and who choice support.
is getting it right?
A
35%
B A
C B C
A B C
On Sunday 7 May 2017 France elected will also elect its parliament. The results “Some projections show that,
its new president Emmanuel Macron will impact the policy led by M. Macron
after a second-round run-off with the and either give him the means to go-
should France use some versions
of the US electoral system,
20%
A B C A B C
far right-wing Front National candidate, vern alone or have him cooperate with
Marine Le Pen. The French presidential other political forces. This election uses Marine Le Pen could have won
elections are conducted via a two-round a two-round system, similar to that of against Emmanuel Macron” 5%A A
B C
B
A C
B C
system wherein individuals cast a single the presidential election.
ballot for their favourite candidate in the
first round, and if no candidate receives But there are many other voting sys- The structure of elections and a nation's
an absolute majority of votes, the two tems around the world, across a wide FIRST-PAST-THE-POST
choice of electoral system can have pro-
highest-scoring candidates participate range of different types of democra- (SINGLE ROUND) SYSTEM
found implications for the effectiveness
to a run-off two weeks later. Since 1965, cies. In Mexico, a presidential republic of democratic governance. It is no sur-
when the current election system was like France, the president is elected via prise, then, that reformers in many na-
used for the first time in France, every a single-round “first-past-the-post” tions continuously strive to improve the A B C
election has gone to a second round. system. In Ireland, instead of voting for way their governments are elected. The Round 1 - A is elected
a single candidate, voters use an ins- complex US presidential election system
This year, there will also be elections in tant run-off or “alternative” system based on electoral colleges is under fire
Great Britain and Germany while France where they rank the candidates in order after it led to Donald Trump being elec- TWO-ROUND SYSTEM
ted despite Hillary Clinton wining more
actual ballot votes. In a similar fashion,
some projections show that, should A A
B B
C C
France use some versions of the US
Round 1 - A & C win
system, Marine Le Pen could have won E. MACRON M. LE PEN F. FILLON J-L. MELENCHON
against Emmanuel Macron.
Karine Van der Straeten and Michel Le
Breton head up a team of economists
and political scientists at TSE and IAST 2016 US PRESIDENTIAL ELECTION RESULTS A B C
studying these different systems to un- Round 2 - C is elected
derstand them, analyse the pros and
cons, and make recommendations for FOR
TRUMP
FOR
CLINTON
the most effective systems. BORDA COUNT SYSTEM
306
ELECTORAL
COLLEGE
VOTES 232 Voters rank the candidates
giving 2, 1 and 0 points
Further reading FOR
CLINTON
FOR
TRUMP
“Vote Au Pluriel: How People Vote TOTAL 63,551,979
A B C
CLINTON VOTES 61,898,584
When Offered to Vote Under Different TRUMP B is elected
Rules?” Karine Van Der Straeten et al., (assuming sincere voting)
Political Science & Politics, 2013
6 tse-fr.eu tse-fr.eu 7
Thinkers
MATT TADDY DOH-SHIN JEON
The true potential Is Google abusing
of big data will be its power?
economic AI D
oh-Shin Jeon is a TSE-UTC professor specialised in industrial organisation.
He works on digital economy issues such as antitrust policies for new
technologies, two-sided platforms, media, net neutrality, etc. In 2016, he
M
att Taddy is a professor in statistics, economics and machine lear- received the prestigious Maekyung-KAEA Award. Here’s his take on the recent
ning at the University of Chicago Booth School of Business. He is also Google-Android case under investigation by the European Commission.
a principal researcher at Microsoft Research New England. Here, he
In 2016, the European commission accused
tells us about his work on big data and the future of economics.
Google of abusing its dominant position
What are the current benefits and However, these predictions are valid only by forcing smartphone makers to pre-ins-
limits of big data research? for a future world that largely resembles directs ML at the problems economists tall its applications on Android devices in
Big data allows us to detect complicated the past one. When we make decisions and policymakers care about. Microsoft an all-or-nothing manner. Whether such
“If we can create economic or
and subtle patterns. That is what is called that change the way the world develops is putting a bunch of attention and practice constitutes abuse of dominance is
predictive analytics. Statisticians and ma- (such as setting prices or deciding who resources on this area, and it is also a causal AI, we can unlock the an interesting question we try to answer,
chine learning researchers have come up goes to school, or which medicines are very active research area in academia huge potential of historical with my co-author Jay Pil Choi (Michigan
with methods that allow pattern disco- paid for), the data loses some of its re- (including people such as Susan Athey, data that companies and State University) in a working paper en-
very in massive datasets. levance. This changing environment is Guido Imbens, Stefan Wager, Victor governments are logging” titled “A Leverage Theory of Tying in Two-
the main limitation of big data. Chernozhukov, Alexander Belloni and sided Markets”.
Christian Hansen).
“Economic AI will be What about big data’s potential data to study society and come up with The leverage theory of tying addresses
groundbreaking, it directs benefits? Is there any risk of misunderstanding solutions to improve people’s lives. But whether a firm which has a monopoly
machine Learning at the One big potential will come from the such large datasets? we should be looking for other ways that power in one market has an incentive to Doh-Shin Jeon
problems economists and combination of machine learning (ML) Existing algorithms can detect patterns in societally useful data can be shared wi- leverage this power to another market by TSE-UTC Professor
and econometrics: what I call “econo- datasets big and small. However, model thout hurting privacy and the tech eco- tying the monopolised good with another
policymakers care about”
mic AI”. Econometrics targets structure validation is key. In ML, everything needs nomy; this is a market design question good facing competition. In this case, the
and causation, while standard ML looks to be validated using data that was not that economists should be looking at! Commission argues that Google holds monopoly profit and that if the company
for correlations and patterns. But AI and used to fit the model. This allows us to near-monopolies in markets such as li- forces consumers to buy its inferior pro-
ML are not the same thing; AI is about rule out patterns that are not consistent What’s most exciting about censed smartphone operating systems duct (by tying both products), it has to
combining multiple ML tasks to solve with future predictions. This simple idea economic AI? and distribution of apps for the Android use part of its monopoly profit to com-
complex and structured problems. For of ‘out of sample validation’ is key to the Economists have become very good at platform. It accuses Google of bundling, or pensate consumers, which ends up re-
example, a chat bot combines natural success of ML: flexibility constrained by using non-experimental data to unders- “tying”, its products to extend its mono- ducing its overall profit.
language recognition and classification validation allows us to be creative while tand the structural reasoning behind polies to other markets including Internet
tasks to answer human questions. avoiding overfit. why things happen. But this type of search market in which it competes with
causal reasoning is completely absent other products such as Microsoft’s Bing. ”The current bundling of Google
In economic AI, we use our knowledge What about the implications of big from the current slate of AI services. If Search with Android OS and Play
of economic and econometric theory data for individuals’ privacy? we can create economic or causal AI, we The existing literature on the leverage Store prevents Bing from using
to break policy questions into a series At Microsoft, we put a huge emphasis can unlock the huge potential of histo- theory of tying developed the “single any qualitative advantage over
of ML tasks. The past 50-100 years of on privacy. But there is another aspect rical data that companies and govern- monopoly profit theorem”. This theorem Google Search to gain users”
economics gives us a great set of rules to your question: private companies do ments are logging. We will then be able argues that when the monopoly’s com-
that can be used to impose structure on have this data, sometimes more data than to democratise economics by making peting product is inferior to the rival’s
problems, and we are now realising the governments, how can they share it? It is data-driven causal decision-making product, a company has no incentive However, this theorem does not take into
Matt Taddy power that comes from using cutting- a complicated issue, and I don’t have an available to a much wider set of orga- to tie its product to extend its mono- account specificities of two-sided mar-
University of Chicago Booth edge ML inside this structure. That is why easy answer. Many of these companies nisations, not just those that can afford poly power. The reason is that without kets. Namely, when it comes to products
School of Business Professor
economic AI will be ground-breaking - it have research arms, like MSR, that use large numbers of PhD economists. tying, its unique source of revenue is the like Google’s applications, prices
8 tse-fr.eu tse-fr.eu 9
Thinkers
ISIS DURRMEYER
Tax reba tes in the car industry
I
are zero on the consumer side while In the context of the Google-Android sis Durrmeyer is a TSE-UTC assis- exist, such as heavier taxes on fuel, and discount. It appears that some buyers
Google makes profit from the other side case, our theory implies that should tant professor who specialises should also be studied.” end up paying the full, maximum price
such as advertising. Bing be superior in quality to Google in industrial organisation, envi- of the vehicles while others succeed in
Search (or become superior in the fu- ronmental and structural economics. In parallel to this study, Isis is also wor- get substantial discounts.”
ture), the current bundling of Google king on the distributional effects of the
She mostly works on theoretical
“Google’s advantage is reinforced Search with Android OS and Play Store French ‘bonus-malus’ policy, trying to
approaches and empirical analysis of “French buyers massively
by the fact that the use of a prevents Bing from using any qualita- identify which citizens were the most
the automotive industry regulation. bought energy-efficient cars
search engine makes it better tive advantage to gain users. Google’s affected. “According to the first results,
advantage is also reinforced by the fact She has analysed the French ‘feebate’ it seems that poorer and richer buyers following this new regulation”
as its creators can harvest more policy and compared it to the US sys-
that the use of a search engine makes it benefited the least from the reform. It
data to build better algorithms” tem of fuel economy standards.
better, as its creators can harvest more also looks like rural areas are less fa-
data to build better algorithms. Isis started to work on the French auto- vourably impacted and of course, diesel On the same subject, Isis is also wor-
motive market in 2009, one year after a cars were advantaged by this regulation king on the price range of a single vehicle
In a classic market, companies could new regulation was implemented in fa- which considers them very fuel-efficient series depending on options, engine
Isis Durrmeyer
be tempted to subsidise consumers to vour of greener vehicles. “The ‘bonus-ma- TSE-UTC Assistant as only CO² emissions are taken into ac- specifications and quality. “I’m deve-
use their search engine. Such a strategy lus’ regulation made energy-efficient Professor count.” The impact of diesel cars has loping complex, flexible models to bet-
would prove counterproductive in this vehicles cheaper through rebates, and recently sparked plenty of public debate ter understand how car manufacturers
case since advertisers only pay money polluting cars more expensive through a of vehicles with fuel efficiency above a in France as diesel engines emit more optimise the pricing of their vehicles.
to reach consumers who do real search. purchase tax” she explains. “I have gathe- determined, “standard”, level. Car manu- particles than traditional cars, as well as I’m hoping to propose better empirical
Our research shows that when prices red a dataset of vehicles sold in France facturers who don’t comply have to pay other pollutants such as nitrogen oxides. models to understand car prices and
on the consumer side cannot be nega- between 2003 and 2008 which allowed taxes.” This system leads companies to
tive, in a two-sided market, the single me to study this new regulation.” increase the price of polluting cars and
monopoly profit theorem is invalid and 6
to encourage buyers to opt for fuel- Emissions between 130 and 160 g/km Feebate policy
tying becomes profitable. Tying allows With her two co-authors, the researcher efficient models. in France
the firm to attract consumers of the tied New technologies offer fascinating re- has tried to understand the impact of this 5
good market and thereby to obtain the search opportunities for economists and ‘feebate’ policy: “Our results show that
profit from the advertising side of the I’m excited to be working on other is- people overreacted. As French buyers
“Our model hints that the French
4
same market. Contrary to what happens sues linked to the digital revolution. In massively bought energy-efficient cars system is more efficient on the Emissions >160 g/km
in a one-sided market, tying does not the future, I’m planning to analyse the following this new regulation. We be- market. It has similar effects
invite aggressive response of the rival economic challenges of artificial intel- lieve this surprising effect is due to se- with lower costs and we believe 3
as the lowest price it can charge is zero. ligence and of the Internet of Things. veral elements: technological progress, that this type of regulation could
making cars more efficient; the regula- be duplicated” 2 Emissions
Specia� issue
ENERGY
CHANGING THE BALANCE OF POWER
14 The issues
The experts
16 Claude Crampes on European
energy policy
18 Stefan Ambec on intermittent electricity
20 The figures
The research
21 Stefan Lamp on projection bias
22 Estelle Cantillon on competitive bidding
23 Georgios Petropoulos and Bert Willems
on network access
24 Giulia Pavan on alternative fuel supply
25 The poll
Energy: the issues
�e industry view
“What’s happening within
the energy sector is more than
a transition, it’s a revolution:
energy-makers have to adapt
and profoundly rethink their
TSE ON THE STAKES
models. Low-carbon energy and
Changing the balance of power
digital technology are ENGIE’s
two main assets to best serve
our customers”
A
Isabelle Kocher
s global demand for energy is expected to continue to rise to feed distribution networks’ ability to meet Using data on ‘green’ cars in Italy, TSE post- ENGIE CEO
transport and housing, the industry faces two challenges: liberali- demand with unpredictable daily and doctoral researcher Giulia Pavan proposes
sation and decarbonisation. The role of economists is to ensure that seasonal variations. the first fully fledged demand and supply “Electricity is an essential
markets, regulation and institutions can adapt to these complex changes. model to study the incentives for adoption answer to global warming.
As is demonstrated over the following of alternative fuels. Meanwhile, fellow TSE
Capacity mechanisms, consumption and production flexibility, storage mana- Investing and innovating to
pages, the future of the energy indus- postdoc Stefan Lamp has found evidence
gement and market regionalisation are central to TSE research in this area. face this challenge call for
try is bound by the challenges and op- that German households’ investment in
Electricity is a unique sector where de- Member states are more interconnec- portunities surging from environmental solar technology is over-influenced by the a robust carbon price and a
mand is weakly reactive to wholesale ted by transmission capacities, through concerns, smart appliances and meters current state of sunshine, which suggests European framework offering
price signals whereas the product can- which electricity moves from one mar- and the social demand for a more de- that behavioural channels might explain investors long-term visibility”
not be stored at large scale. Following ket zone to another, following the laws centralised framework. Claude Crampes, the low take-up of otherwise profitable
the push towards liberalisation that of physics that public regulations often one of TSE’s foremost experts in this renewable technologies.
began in the 1990s, the industry needs forget to obey. Companies, markets field, reveals how the EU’s formerly
to complete its transition from traditio- and policies will have to get used to pro-competitive energy policy is being
nal vertically integrated utilities to com- the new reality of cross-border effects. distorted by new environmental prio- “There is no life without energy. But
petitive separated businesses. Meanwhile, global electricity genera- rities. Claude has also teamed up with producing energy without generating
tion is changing dramatically due to TSE professor Stefan Ambec to esti- the perilous climate change remains Jean-Bernard Lévy
In Europe, a continent-wide approach the need to reduce emissions and in- mate how policymakers can more ef- EDF CEO
one of the biggest challenges of our
is increasingly being adopted in the de- troduce mixed energy sources. This has fectively harness intermittent resources
time. We have the responsibility “Satisfying the energy needs
sign of electricity markets and policies. placed new strains on transmission and such as wind and solar power.
towards future generations to face it of a growing world population,
with economic efficiency” curbing global warming, and
Christian Gollier, TSE professor adapting to changing customer
Energy & climate at TSE Gas chair behaviours and expectations are
The continued scientific excellence of energy economics in Toulouse has In October 2016, TSE teamed up with MINES ParisTech,
Also in this dossier, we feature recommen- the three challenges that Total,
stimulated the creation of a new collaborative platform, the TSE Energy Paris-Dauphine University and IFP School to launch the
dations about using auctions to boost sup- as an energy major, must meet
and Climate centre. This initiative brings together academic and industrial Gas Economics Chair. Industry partners EDF, GRTgaz
port for renewable energies given by TSE over the next 20 years. Providing
partners – significantly, EDF, Engie and Total – to build new analytical tools and Total have pledged to support the work of the associate Estelle Cantillon to the European
and exchange data and ideas on the economics of energy and climate change. Chair until the end of 2020 to strengthen cooperation affordable, reliable and clean
Commission. And TSEconomist founder
As well as producing scientific publications and hosting conferences and with industry in the sector and to help achieve energy Georgios Petropoulos and TSE associate energy, that's what it means to be
seminars, this initiative will facilitate the transfer of knowledge between transition. The Chair organises its first international Bert Willems examine how to provide effi- committed to better energy”
researchers, practitioners and policymakers, and inform the public debate. conference at Paris Dauphine on June 27. cient network access to low-carbon power
generators. Patrick Pouyanné
Total CEO
14 tse-fr.eu tse-fr.eu 15
Energy: the experts
whereas the demand by final consumers Short-circuited
cannot be made contingent on the state
CLAUDE CRAMPES ON THE TROUBLE WITH MULTIPLE TARGETS of nature that prevails at the production priorities
Energy strategy
nodes. RES plants should not be viewed Claude argues that the 20-20-20 tar-
as substitutes to fossil-fuel plants, which gets and their successors are bureau-
are necessary complements to satisfy cratic and incoherent, pulling EU policy in
demand by non-responsive consumers. many different directions at once. “They
mismatch
create both a financial burden that cannot
The white be sustained within the current institu-
tional framework and a public commit-
target ment to constrain the future structure
Rather than setting a quan- of the energy industry. Because of these
titative objective for energy savings, the effects, the role of competition will wit-
C
EU should have encouraged reduced her, and the rationale for managing the
laude Crampes is a TSE professor who specialises in the economics of consumption by creating a high car- energy industry independently from en-
networks and energy markets. He has been a member of the economic bon price or tax. “Energy saving is not vironmental policy will disappear.”
council of the French regulation body for energy and is a general the natural outcome of a competition
reference in the energy field. In two contributions to books on competition policy that promotes price cuts,” says A well-designed Emission Trading System
and environmental policies, he reviews the EU’s targets for cleaning, greening Claude Crampes Claude. “Increasing consumers’ surplus could produce a much higher price for
and saving energy. In particular, he examines how the pro-competitive policy TSE-UTC Professor while decreasing energy consumption carbon emissions, providing a stronger
launched in the 1990s is being distorted by new environmental priorities. requires huge investments in insula- incentive to reduce energy consump- No-carbon electricity generation
ting buildings and high levels of R&D in tion and invest in developing green tech- in Europe (2012)
The 2007 Energy Policy for Europe has – apparently driven by macroeconomic
the industries that manufacture electri- nologies. “The need for custom-made
three objectives: increase the security trends rather than the balancing of bene- The green Percent of 81% - 100% 21% - 40%
cal appliances. Again, this is a matter of policies to sustain renewables and en-
of supply; ensure competitiveness and fits from pollution abatement and expec- no-carbon 61% - 80% 0% - 20%
the availability of affordable energy; pro- ted emission costs – has remained well target industrial policy.” ergy saving can be viewed at best as generation 41% - 60% No data
mote environmental sustainability and below the penalty for non-compliance. To achieve the target of a 20% share of an acknowledgment of the failure of
combat climate change. Central to the renewable energies (then 27% by 2030), the current mechanism, and at worst
policy are three targets, dubbed as the The key problem is that the main party EU member states have implemented va- “By defining three targets as as the inability of the authorities to un-
"three 20 for 2020" when launched, and concerned with global warming hasn’t rious policies. But the most widely used pillars of their environmental derstand that curbing polluting emis-
recently adjusted to 2030: yet been born. “Governments, inter- sions is the paramount objective, next to
financial tool is a non-market system: policy, European authorities be considered as intrinsic objectives on
national organisations, and NGOs are fixed feed-in tariffs (FITs) paid to green which the two other policy tools should
are putting out noisy signals on a par with the curbing of greenhouse
• a 20% reduction in greenhouse gas in charge of speaking on behalf of our producers to compensate high invest- be subordinated.”
what the actual objective is and gas emissions.”
emissions by 2020 compared with great-grandchildren,” says Claude. “Entities ment costs and low reliability. Despite
1990 (40% by 2030)
how to achieve it”
mandated for five or ten years by egois- the benefits for technological develop- To effectively combine the EU’s ener-
• increase efficiency to save 20% tic and short-sighted agents, and inten- ment, Claude shows that the worldwide gy and environment goals will require
of energy consumption compared sively lobbied by industrial groups, are competition framework has forced out an independent intergenerational fund
with projections for 2020 supposed to take conflicting decisions European manufacturers: “The FIT-based
(27% by 2030) in favour of agents with unknown pre- EU policy has excluded European cham-
Increasing the flexibility of demand Intergenerational created to manage common natural re-
for electricity should also be a prio- sources in the joint interest of present
• achieve a 20% share of renewable ferences and technologies living a cen- pions from the equipment market ins- rity and R&D must be encouraged
welfare and future generations. “Such an agency
energies in overall consumption by tury from now. Because of structural tead of giving them a boost. Thus, the will not escape the bureaucracy curse,”
to create electronic tools that allow If the problem to be solved is global
2020 (27% by 2030) myopia, the quantity of permits given industrial policy slice of the promotion says Claude. “However, by efficiently
consumers to control their demand warming, says Claude, market mecha-
for free or auctioned is too large. And plan is a total failure.” efficiently. “But the solution is not just nisms cannot work efficiently without allocating the rights to emit pollutants
The black excess supply means low carbon prices technical,” says Claude. “It also requires public intervention that embraces the and using the resulting revenue to ini-
with almost no effect on industrial pro- Claude observes that the promotion of a regulatory framework that respects tiate green and white R&D programmes
target duction and consumption. This in turn RES electricity is not accompanied by a the principles of an efficient allocation
big picture. “The solution cannot come
from the superposition of uncoordinated and to sustain social programmes against
To meet the target of decreasing green- has weak effects on emission reduc- comparable increase in flexibility on the of resources. The legal framework for policies, because the promotion of re- fuel poverty, the proposed agency would
house gas emissions, the EU launched the tion, energy saving, and the encoura- demand side. European authorities are distributed load shedding must also be newable sources of energy and reduc- internalise the overlapping effects of
Emissions Trading Scheme, a cap-and- gement of renewables.” encouraging the development of ran- clearly defined.” tions in energy consumption should not separate policies.”
trade system. So far, the carbon price dom and cyclical sources of production,
16 tse-fr.eu tse-fr.eu 17
Energy: the experts
but polluting. They analyse the impact production capacity so that it can charge Smart meters with load-switch devices
of three policy instruments in a compe- the monopoly price when windmills are and batteries also help consumers to
titive electricity industry: a carbon tax on not spinning. This increases the retail adapt to price changes. Making consu-
fossil fuel, FITs and RPS programmes. price of electricity. mers reactive reduces production costs
By increasing both the operating cost − including the back-up equipment cost
and the price of electricity produced by Regulation is thus required to improve and the environmental cost of ther-
thermal power, a carbon tax makes re- welfare even with competition from mal power – but it exposes risk-averse
newable energy more competitive and wind power. Stefan and Claude point consumers to price fluctuations. Such
reduces electricity production from fos- out that the carbon tax that would fix risk-exposure effects should be incor-
STEFAN AMBEC ON INTERMITTENT ELECTRICITY sil fuels. It increases investment in wind the two market failures – the exercise porated into the cost-benefit analysis
At the mercy
power and reduces thermal power fa- of market power and the environmen- of installing smart meters.
cilities. Yet the total production capa- tal externality – should vary with the
city from both sources of energy may availability of the intermittent source.
increase.
Looking
forward
of the elements
Smart
Much more can be done within Stefan
“A carbon tax makes renewable solutions and Claude’s framework. Diversification
energy more competitive and
This model allows Stefan and Claude can mitigate intermittency. Using a similar
reduces electricity production to identify the social value of techno- model in a 2012 paper, Stefan and Claude
from fossil fuels” logical solutions for the intermitten- have shown that it is optimal to invest in
cy problem. Energy storage, such as two different intermittent sources that
P
olicymakers’ efforts to clean up electricity production have often pumping water into upstream reser- do not produce energy at the same time,
Both FITs and RPS enhance the pene-
aimed to substitute fossil fuels with renewable sources. Unfortuna- voirs, reduces the burden of intermit- even if one is more costly. Similarly, in-
tration of renewables into the energy
tely, electricity produced from wind turbines and solar panels is tency. The marginal value of energy vesting in wind or solar power at diffe-
mix. When they are designed to target
highly unpredictable. Stefan Ambec is an INRA research professor at TSE storage depends on the cost diffe- rent locations, or using other intermittent
the efficient share of renewable sources
and member of the IDEI. With TSE’s Claude Crampes, he has produced the Stefan Ambec rence between intermittent and re- sources such as tidal or wave power,
of energy, they induce too much elec-
TSE-INRA Professor liable sources of energy. would reduce the probability of relying
first analytical assessment of energy policies that tackles the problem of tricity production, investment in ther-
only on thermal power.
intermittent production. mal power and environmental pollution.
in real time, whereas price signals do They should be complemented by a tax
Various policy instruments have been renewable portfolio standards (RPS)
not change as quickly. Even if whole- on electricity or fossil fuels. In particular,
adopted to decarbonate electricity pro- programmes which generally require a
sale electricity prices vary with elec- the tax on electricity that only finances
duction: while several countries tax their minimum fraction of electricity demand
CO² emissions, the EU caps them with to be met by renewable sources. Most tricity provision, the retail prices that the FIT is not high enough to obtain an Global research
consumers pay do not. Even if prices efficient energy mix. TSE is just one of global array of prestigious partners in the GEMCLIME research
tradable allowances. European countries have opted for the
feed-in tariff (FIT), purchasing renewable could vary with weather conditions, project, which focuses on the important and complex problems of energy econo-
“Even if electricity prices
electricity at a price fixed well above the most consumers will not instantly react Market mics and climate change. GEMCLIME, or Global Excellence in Modelling of Climate
wholesale price. FITs have been quite suc- to price changes.
could vary with weather cessful in fostering investment in wind
power and Energy, follows an integrated approach to modelling the impacts of public
policies, with a particular focus on the economics of renewable energies and the
conditions, most consumers and solar power in Europe, although the Stefan and Claude also show that if a valuation of non-marketed goods. The consortium also includes researchers from
will not instantly react to price difference is generally covered by Policy monopolistic thermal-power producer
non-economic disciplines, including political scientists, sociologists, lawyers and
price changes” a tax on consumers. faces competition from a fringe of wind-
instruments power producers, this does not alter its
environmental scientists.
The unpredictability of wind and solar Stefan and Claude consider a model with ability to exert market power. Worse still,
More information at: www.gemclime.cuni.cz
The type of support for renewables energy makes power dispatching more two sources of energy: one is clean but competition from wind power encou-
also differs. US states tend to opt for challenging. Supply must match demand intermittent, whereas the other is reliable rages the fossil-fuel producer to reduce
18 tse-fr.eu tse-fr.eu 19Energy: the figures Energy: the researc�
STEFAN LAMP ON PROJECTION BIAS
14%
6%
GROWTH OF INDIA’S ENERGY
OF THE WORLD'S ENERGY
COMES FROM RENEWABLE
SOURCES
CONSUMPTION IN 2015 (source: OECD)
(source: Enerdata)
Globa� energ�
consumptio� i� th� worl�
Mtoe
2000
2001
2002
2003 Europe
(source: Enerdata)
2004 North America
2005
Latin America
2006
2007 CIS
2008 Asia
2009 Pacific
Sunspots that matter
2010
2011
Africa
2012 Middle-East
2013
2014
2015
0 5,000 10,000 15,000
I
nstalling rooftop solar energy is an expensive investment for most fami- results indicate that profit expectations
lies, and one which requires them to forecast future utility flows. TSE lead to impulse purchases in exceptio-
CO² emission� 25%
SHARE OF RENEWABLES IN
postdoctoral researcher Stefan Lamp has investigated solar investment
decisions by German households, and finds evidence that choices are over-
ly influenced by the current state of sunshine. Evidence for projection bias
nally sunny periods and to underinvest-
ment in cloudy periods.
aroun� th� worl� ELECTRICITY PRODUCTION points to the importance of behavioural channels in explaining the low take-
In these settings, it is common to find
low adoption rates, even though invest-
2000-2015 / Unit: MtCO2 IN CHINA IN 2015 up of otherwise profitable renewable-energy technologies.
ments in renewable technologies is finan-
(source: Enerdata)
In behavioural economics, projection bias cially attractive, a phenomenon known
refers to people’s tendency to overpre- as the energy-efficiency gap. Stefan’s
“In line with projection bias,
dict how much future preferences will re- research suggests that targeted infor-
Stefan’s results indicate that
(source: Enerdata)
semble current preferences. Even though mation campaigns could help to bridge
projection bias is a well-established phe- exceptionally sunny periods this gap and increase product uptake.
nomenon in the theoretical literature, it lead to impulse purchases of As solar investments are often profi-
has proven difficult to identify in empi- solar technology” table for households as well as benefi-
rical settings. Stefan’s research is the cial for the society, these interventions
first to explore projection bias in the re- can improve overall welfare.
newable energy context, where externa- installation time. Bad weather realisa-
lities lead to low investment. tions with rain and cloud cover lead to Stefan’s results suggest that other im-
less adoption at a similar time lag. This portant consumer decisions are also li-
Below 100 100 to 250 250 to 500 Stefan’s results show that residential effect is, however not fully symmetric kely to be affected by projection bias. No
solar uptake increases 7-12 weeks after which indicates the importance of be- clear recipe yet exists on how to de-bias
500 to 5000 Above 5000 an exceptionally sunny week. This time havioural biases for aggregate market consumers, which leaves an interesting
lag precisely corresponds to the average outcomes. In line with projection bias, his field for future research.
20 tse-fr.eu tse-fr.eu 21Energy: the researc�
ESTELLE CANTILLON ON COMPETITIVE BIDDING GEORGIOS PETROPOULOS AND BERT WILLEMS ON NETWORK ACCESS
Sold! Auctions for renewables
A
uctions offer exciting opportunities to maximise the benefits of state
aid for renewable energy. In her recent report for the European Com-
mission, TSE associate Estelle Cantillon (FNRS, Université Libre de
Bruxelles) identifies when competitive bidding mechanisms are useful and
how they can best be designed to support renewables. Here, we present her
key recommendations.
Auctions can bring down the cost of However, auction design is critical to par-
support for renewables by having bid- ticipation and competition. It is a science
ders compete. In doing so, bidders re- because it relies on theoretical, empi-
veal information about the minimum rical, computational and experimental
level of support they need. This is di- analyses to ground recommendations.
rectly related to EU guidelines on public It is also an art because every applica- Estelle Cantillon
Université libre
support for environmental protection tion is special and will often warrant a
Cleaning up power markets
de Bruxelles
and energy which emphasise the role tailored design. Several good practices
of competitive mechanisms in minimi- emerge nevertheless: using different
sing state aid. technologies, a flexible product defi- In case of extreme uncertainty about fu-
nition, an elastic demand, ensure bid- ture costs, bidders may not be willing to
Auctions are also selection mechanisms der information, stable regulation and commit to a project. For such technolo-
that reveal information that can help penalties. gies, remuneration schemes based on
C
determine which technologies should ex-post costs and production levels may
oordinating the timing of new production facilities is one of the challen-
be supported. This is easier if the ser- When the agency has very specific needs be more appropriate.
ges of liberalised power sectors. It is complicated by the presence of “Allocating network access
vice provided by different technologies that can only be met by a limited number
is sufficiently comparable and the ten- of suppliers, a multi-technology auction transmission bottlenecks, oligopolistic competition and the unknown on a short-term competitive
dering agency can make explicit its pre- with flexible product design is unlikely to “EU guidelines on public support prospects of low-carbon technologies. Former TSE PhD student Georgios basis distorts investment
ferences about the technology mix. To ensure sufficient competition. Instead, for environmental protection Petropoulos (Bruegel) and TSE associate Bert Willems (Tilburg) have built a decisions, as brown firms will
fulfill this role, the auction must have intense due diligence akin to the review and energy emphasise the role model encompassing a late and early investment stage, an existing ‘dirty’ and
pre-empt green competitors
an all-encompassing or a simultaneous process required in cost-plus type of re- of competitive mechanisms in a future ‘green’ technology and a single transmission bottleneck, and compare
by investing early”
technology-specific format. gulation will be especially valuable in de- minimising state aid” dynamic efficiency of several market designs.
termining the right reserve price. In these
circumstances, an administratively set Before the liberalisation of the energy happens in the EU with counter-trading,
An auction will never extract a compe-
tariff or premium can do the job. A big challenge is to clarify how the sector, generation investments were cen- only exacerbates this problem.
titive price if there is only one bidder.
agency will compare the different of- trally planned and coordinated. Because Regulators could, in theory, restore ef-
fers. If the agency’s policy objective is of transmission constraints, a new power The researchers show that dynamic effi- ficiency by imposing an investment tax
to restore efficiency in the presence of plant may require existing plants to re- ciency is restored with long-term trans- on early investment. But to determine
duce production and preclude otherwise mission rights that can be traded on a the optimal tax level, regulators would
EU carbon price Price market failures and incorrect prices, tech-
EUR nological neutrality may require treating profitable future investments. In a libe- secondary market. Investments are ef- require information about the green en-
8.4 different technologies differently. If the ralised sector, market design needs to ficient in two situations: trant’s investment costs that is not rea-
8 aim is to minimise the cost of support, induce firms to internalise those inte- dily available. So the researchers prefer
there is no reason to treat technologies raction effects. 1) The brown incumbent has full bar- the introduction of long-term proper-
7.6
differently, unless the agency has prefe- gaining power in the secondary market ty rights, and show that efficiency is
7.2
rences over the technology mix. Ensuring The current practice of allocating network and fully internalises the effects of its achieved with both financial and phy-
6.8
a level playing-field means treating all access on a short-term competitive investment timing; sical transmission rights. However, as
6.4
bids equally unless there are objective basis distorts investment decisions, 2) The initial allocation of the property financial rights do not raise concerns re-
6 garding strategic withholding of trans-
differences in the service provided or the as ‘dirty’ or ‘brown’ firms will pre-empt rights is competitive and the green en-
5.62 agency is pursuing an efficiency objec- ‘green’ competitors by investing early. trant is an active bidder in the primary mission capacity (as shown by Paul
Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Compensating early investors for fu- market with sufficient information about Joskow and Jean Tirole), they are the
tive and there are differences in exter-
nal costs and benefits. ture network congestion, as for instance future investment costs. preferred option.
22 tse-fr.eu tse-fr.eu 23Energy: the researc� TSE POLLS
GIULIA PAVAN ON ALTERNATIVE FUEL SUPPLY
How to promote green cars What is the next big evolution
I
f customers are to buy a ‘green car’ that runs on alternative fuel, they
need access to plenty of suitable filling stations. Meanwhile, stations are
unlikely to install alternative fuel pumps if there are few ‘green cars’ to
rebate on the price of alternative-fuel
cars and a 50% subsidy for the instal-
lation of an alternative-fuel pump. She
in the electricity industry?
use them. But fuel supply is seldom considered in analysis of the adoption of finds that subsidising consumers would
increase the share of LPG cars by 30%
environmentally friendly vehicles. Using a rich dataset from the Italian mar-
and CNG cars by 33%, leading to a 3% and
1. A production breakthrough
ket, TSE postdoctoral research fellow Giulia Pavan has written the first paper
5% increase in the density of filling sta-
to propose a fully fledged demand and supply model to study the incentives
tions. Subsidising filling stations would 2. Large-scale storage
for adoption of alternative fuels. increase the availability of alternative
In Giulia’s joint model, potential green private holders and merging it with in- fuels by 60% and 66% for LPG and CNG 3. Demand-responsiveness
car customers consider the price and formation on location and range of fuels respectively; increasing car share by 17%
the density of stations offering alterna- offered by Italian filling stations in 2012. and 96% for LPG and CNG respectively. and energy efficiency
tive fuels, such as liquefied petroleum She was also able to exploit differences These results suggest that subsidising
gas (LPG) and compressed natural gas in local legislation relative to traffic limi- fuel retailers to offer alternative fuels is 4. Consumer-produced power
(CNG). At the same time, filling stations tations for traditional fuel cars, reduced an effective policy to indirectly increase
only install alternative-fuel pumps if there taxes for alternative-fuel vehicles and low-emission car sales.
are enough customers driving green cars laws requiring filling stations to supply
in the area. Giulia uses this framework at least one alternative fuel.
to compare the effectiveness of diffe- Giulia’s results suggest
rent environmental policies designed to The main takeaway of Giulia’s demand that subsidising fuel retailers
boost adoption of green cars. model is that consumers are sensitive to offer alternative fuels is an
to fuel availability and this effect is es-
effective policy to indirectly
The setting for Giulia’s study is the Italian pecially strong for alternative fuels. On
market, which is characterised by a high the filling station side, her model al-
increase low-emission car sales
share of new LPG and CNG cars and a lows to estimate the number of cars
heterogeneous dislocation of filling sta- needed for a profitable entry of a given
tions among markets. She assembled of filling stations. However, Giulia emphasises that the
a novel dataset, collecting data on car two policies’ results are mixed and
sale price, fuel type and other charac- Using her demand and entry estimates, should be evaluated at the local mar-
teristics for newly purchased cars by Giulia compares two policies: a €2,000 ket level. The higher cost effectiveness
of the price rebate is due to the subs-
EBATE.TSE-F R.EU/POLL
Map of Natural Gas Vehicle (NVG)
titution between traditional-fuel and
alternative-fuel vehicles, which is smal- GIVE YOUR OPINION ON D
Compressed Natural Gas (CNG) 26 ler in case of filling-station subsidies.
filling stations in Europe 19 Although consumer rebates are more
effective in terms of CO² per car reduc-
RECENT POLL RESULTS FROM TSE DEBATE:
6
154
1 tion, they do not indirectly support the
15 3
235 entry of filling stations. Therefore, the
71% 68% 59% 85%
44
0 4
130
effect of the policy would disappear
26
73
867 once the subsidy expired. On the other
148
6
11 203
side, the effect of a filling-station sub-
Source: http://cngeurope.com/
165
53 136 11 17 sidy on alternative-fuel market shares
don’t see “uberisation” don’t believe intelligent think economic growth believe a federal Europe
4 2
2
18 would be more persistent since filling
1046
2
112 stations would remain in the market. as an economic threat software and robots is not necessary to is the way forward
7 38 10 19
Both policies imply, on average, a 1% will create mass eliminate extreme poverty
Last Update: April, 2017 CO² reduction per car, showing high va- unemployment
riability among markets.
24 tse-fr.eu
debate.tse-fr.euActors
PHILIPPE TRAINAR, SCOR CHIEF ECONOMIST
Finding a port in the storm
T
errorism and solar storms are among the many new risks that must by humans, Trainar explains: “When you
be faced by 21st-century society. The size and complexity of such risks are richer, you have more things to lose;
in a globalised world demand big ideas and complex solutions. This is when you have more interactions, some
the stage set for reinsurance companies like SCOR, which cover the risks of will be negative and require coverage.
direct insurers. Here, SCOR’s chief economist Philippe Trainar explains why Climate change also contributes to the
growth of risks – Toulouse has already
he values the TSE-SCOR partnership so highly. Together with TSE’s Stéphane
worked hard on this issue. People often
Villeneuve, he also outlines some of the new challenges facing the industry.
congregate in dangerous areas, along
With a balance sheet of €41.6bn and The reinsurance industry is in excellent coastlines and rivers, probably because
more than 2,500 employees, SCOR is a health, says Trainar, and it will continue this is where contacts are made more
giant of the global reinsurance indus- to grow and diversify as the sources of easily. This also increases the need for
try. In its search for creative answers risk become increasingly complex: “The reinsurance. So this is a market that has
to complex problems, Trainar says the proof is that today all investors are tur- a great future.”
company is “extremely satisfied” with its ning to the reinsurance market. We are
long-standing partnership with TSE. “It now witnessing a kind of equalisation
has brought us great rewards. The re- of profits because when you increase “What is being written today
search deals with the economy of risk, the capacity of a market, prices tend to is completely different from
an area to which French economists have drop. But this market benefits from the what we wrote 10 years ago.
contributed enormously. As a reinsurer, expansion of the universe of risks, es-
For that, we are extremely
we at SCOR are very interested in this pecially extreme risks.”
question, but above all, we want to un- grateful to the Toulouse
derstand how risk transforms and in- The growth and enrichment of the world researchers” Digitalisation is another revolutionary ways of sharing very high risks? How today is completely different from what we
fluences economic decision-making.” population has multiplied the risks faced force in the reinsurance industry, and should risk-based profitability evolve?” wrote 10 years ago. For that, we are extre-
a key focus of TSE research. “Whether mely grateful to the Toulouse researchers.
Stéphane Villeneuve is a TSE-UTC maths we like it or not, our insurance contracts The support of TSE economists on these TSE researchers have brought us solutions
professor and coordinates the “Risk in future will be increasingly individua- issues, says Trainar, has helped to reshape on issues that transcend everyday activi-
Markets and Value Creation Chair”, which lised,” explains Villeneuve. “Machines SCOR’s business strategy. “With Christian ties. These are often questions that will in-
is sponsored by SCOR. The big news in will measure the way we drive, eat and Gollier, Stéphane Villeneuve, and the rest of fluence our long-term strategy. Today, we
insurance, he says, is the globalisation exercise. This will considerably alter the Toulouse team, we have already made can celebrate a truly extraordinary record
of risks: “The event that woke everyone the relationship between insurers and a lot of progress. What is being written and a very fruitful partnership.”
up to this was the terrorist attack on the policyholders, raising new ethical and
World Trade Center in 2001, which had a legal issues.”
global financial impact. Another example
is the risks of drought in Ukraine which The TSE-SCOR partnership has already Cutting-edge research
led to a spike in agricultural prices that gone above and beyond its original goals, Since 2008, the SCOR Chair “Risk Markets and Value Creation” has supported theo-
sparked a revolution in Tunisia.” says Trainar. “There has been excellent, retical and applied research at TSE on regulation of insurance markets and risk
extremely precise research at the inter-
management, combining methods from financial economics, industrial organisation
The complexity of such multi-dimensional national level. This research is also very
and econometrics. Key topics include:
phenomena is daunting, but Villeneuve enriching for SCOR because it allows us
• Longevity risk, long-term care and (social) insurance
emphasises that taking risks can also to address direct questions to the TSE
• Risk management of large environmental risks
be very positive, and coverage offers team. These may sometimes seem a
• Methodology of credit risk models
opportunities for growth and coopera- bit ‘clumsy’, but the researchers have a
• Regulation, liquidity and solvency risks
tion: “An investor must take risks. The great capacity to listen, to reformulate
• Risk attitude
role of an insurer or reinsurer is to share the questions in a general framework
Philippe Trainar risks, to accompany economic actors and, above all, to provide answers. To More information in the IDEI special dossier on Risk-sharing
SCOR Chief Economist
External member, TSE board of directors
and find the mechanisms which miti- what extent are risk premiums insurable Mechanisms on the IDEI website.
gate catastrophes.” or reinsurable? What are the optimal
26 tse-fr.eu tse-fr.eu 27You can also read
