Designing efficient market interventions through isoprofit modelling to accelerate the decarbonisation of power systems

Abstract

We propose a framework to design cost-free market interventions aiming to accelerate the decarbonisation of power systems. The framework relies on isoprofit modeling and partial equilibrium analysis of supply curve shifts brought about by the interventions. As opposed to Levelised Cost of Energy (LCOE) based techniques, the isoprofit approach uses a fully-fledged profit function allowing for the study of tax collection effects of interventions. Because it uses geographical information system tools, results are sensitive to the territorial exclusion criteria employed. We specifically analyse the reduction of wind farms’ corporate income tax rate as a market intervention subject to tax revenue neutrality. We apply the proposed framework in a territory of Chile, which is the source and destination of wind energy in the context of the decarbonisation of a simplified power system. Our results yield a shortening of the complete decarbonisation process by three years. Because the intervention has no additional cost for consumers and brings forward in time any producers’ surplus, it produces a welfare improvement. Using this framework to prescribe similar market interventions for other territories can help to the rapid and cost-efficient attainment of a low-carbon global economy.