Disaggregating the electricity sector in a CGE model to allow competition theory to explain the introduction of new technologies to the sector

Abstract

The electricity sector in most CGE models is highly aggregate which makes it unsuitable for use in the analysis of the impacts of climate change or energy policies on the sector. A conventional approach is to disaggregate this sector into different technologies and then recombine the outputs (or costs) into that of a single sector using an aggregate production function (such as CRESH) or market share function (such as LOGIT). Such an approach is useful but not entirely transparent because it does not explain completely why the outputs of different technologies are only ‘imperfectly substitutable’ while electricity is a homogeneous commodity. In this paper we propose a different approach where the ‘imperfect substitutability’ of different electricity outputs is explained not in terms of the nature of output and distribution activities but in terms of the different types of capacities used in the generation of electricity. These capacities have different economic and technological characteristics which differentiate themselves from one another and these characteristics also make each type of capacity suitable for the supply of electricity to different types of demand (or electricity ‘loads’). The ‘imperfect substitutability’ between different electricity generation technologies, therefore, is derived from the imperfect substitutability between these different generation capacities rather than between their outputs. We illustrate the applicability of the new approach with some empirical examples taken from the case of the Japanese electricity sector.