Welfare analysis in an imperfectly competitive electricity market with distributed renewable generation

This thesis aims to analyze the optimal amount of renewable electricity generation using the dominant firm and the fringe model. In this model, the dominant firm(s) produces non-renewable electricity and the fringe produces renewable electricity. The fringe represents the distributed renewable energy generation that has become a phenomenon in Turkey in the last decade. The optimality stems from the trade-off assumption that generating renewable energy is more costly and non-renewable energy causes environmental externalities. Solving the model under fixed and premium tariffs and for different number of oligopoly firms allows examining the differences between the two FiT mechanisms and the effects of market power and marginal costs on the equilibrium outcome. Matlab software is used to simulate the solutions over a set of chosen parameters to show these effects graphically. Shortly, in the concentrated markets, the fixed tariff outperforms the premium tariff in terms of total welfare, however, the premium tariff leads to higher renewable generation which can be preferred as well for environmental purposes. This effect is most evident in the monopoly and the fringe case. As the number of oligopoly firms increases, namely the market becomes less concentrated, the two policy mechanisms approximate each other. When the model is adjusted to the current HHI level of the Turkish electricity market, the two mechanisms generate nearly the same outcomes for the chosen set of parameters. Beyond these theoretical findings, this research proposes a framework to evaluate the optimality of the implemented tariff policies if the cost data is available.