Release of Working Paper

Risk Aversion, Environmental Regulation and Cournot Competition on Electricity Wholesale Market



By Houeida Hedfi, Abdessalem Abbassi and Ahlem Dakhlaoui



Abstract: This paper analyses the effect of green energy promotion policies in a decentralized power industry. We develop a Cournot duopolistic competition between risk-adverse operators each detaining polluting and clean technologies. We show that the subsidy-based policy for green energy allows the liberalization of the electricity industry to achieve the double objective of reducing pollution and electricity prices. However, these effects are mitigated as the green firm is more risk adverse. Taxation policy of dirty technology is more effective in reducing pollution but we show how it can weigh against reducing the price and the electricity supply. However, if the risk aversion of the dirty operator increases, the negative effect of the tax decreases.

Keywords: wholesale electricity market, Cournot competition, Green technology, Dirty technology, Environmental regulation.
JEL Classifications: L94, Q25.