The Northeast Power Coordinating Council(NPCC)comprises American states and Canadian provinces marked by a significant penetration of variable renewable energy sources(VRES)and hydropower production.Major demand centres in New England,New York,Ontario,and Quebec that are subject to stringent to stringent caps on CO2 emissions are included in the NPCC.For example,the Regional Greenhouse Gas Initiative(RGGI)mandates a 30% reduction in CO2 emissions from power plants by 2030 relative to 2020 levels,which affects generation in New England and New York.Likewise,Quebec participates in the Western Climate Initiative(WCI),which aims to reduce CO2 emissions by approximately 40% by 2030 relative to 1990 levels and included Ontario until recently.Both RGGI and WCI create cap-and-trade(C&T)systems for CO2 emissions in which the shadow price on the binding CO2 emission constraint is the permit price that generators incur as an additional cost for their CO2 emissions.While support schemes such as feed-in tariffs and the C&T system have induced an increase in VRES generation,they have also enhanced the role of energy storage,viz.,by hydro reservoirs especially in Quebec.In a perfectly competitive power system,storage capacity would be deployed in a socially optimal way to smooth out the fluctuations in uncontrollable VRES output(Bushnell,2003).However,given the persistence of market power in the electricity industry(Tangeras and Mauritzen,2018),hydro reservoirs may be used in a strategic manner to the benefit of their proprietors.Consequently,incentives for VRES and social welfare may be detrimentally affected by such exertion of market power.In order to investigate the extent of these distortions in the NPCC and to propose policies for their mitigation,we develop a bottom-up equilibrium model to quantify the welfare losses from the strategic use of hydropower reservoirs and to assess counterfactual CO2 emission caps.
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