Utility and Welfare Optimization: Theory and Practice in Electricity

268 Pages·2015·1.982 MB·English

by  Chris Harris (auth.)

Utility and Welfare Optimization
Utility and Welfare
Optimization
Theory and Practice in
Electricity
Chris Harris
UTILITY AND WELFARE OPTIMIZATION
Copyright © Chris Harris, 2015.
Softcover reprint of the hardcover 1st edition 2015 978-1-137-38480-5
All rights reserved.
First published in 2015 by
PALGRAVE MACMILLAN®
in the United States—a division of St. Martin’s Press LLC,
175 Fifth Avenue, New York, NY 10010.
Where this book is distributed in the UK, Europe and the rest of the world,
this is by Palgrave Macmillan, a division of Macmillan Publishers Limited,
registered in England, company number 785998, of Houndmills,
Basingstoke, Hampshire RG21 6XS.
Palgrave Macmillan is the global academic imprint of the above companies
and has companies and representatives throughout the world.
Palgrave® and Macmillan® are registered trademarks in the United States,
the United Kingdom, Europe and other countries.
ISBN 978-1-349-57999-0 ISBN 978-1-137-37100-3 (eBook)
DOI 10.1007/978-1-137-37100-3
Library of Congress Cataloging-in-Publication Data
Harris, Chris, 1961–
Utility and welfare optimization : theory and practice in electricity /
Chris Harris.
pages cm
Includes bibliographical references and index.
1. Electric utilities—Econometric models. 2. Electric utilities—Costs.
3. Electric utilities—Rates. 4. Utility theory. I. Title.
HD9685.A2H2843 2015
333.79392015195—dc23 2015013403
A catalogue record of the book is available from the British Library.
Design by Newgen Knowledge Works (P) Ltd., Chennai, India.
First edition: October 2015
10 9 8 7 6 5 4 3 2 1
To Holly
Contents
List of Figures i x
List of Tables x iii
Acknowledgments x v
1 Introduction 1
2 The Political Economic Framework 5
2.1 Core Axes for the Political Economy of Electricity 7
2.2 The Utilitarian, Contractarian, and Libertarian
Approaches 1 1
2.3 Relevance of the Left/Right Political Axis 2 8
2.4 The Raising of Taxation and Disbursement and
Distribution of Benefits 2 9
2.5 Individual Choice 3 1
2.6 Approaches to Income Poverty, Other Poverties,
and Inequality 3 5
3 Economic and Market Framework 3 9
3.1 The Economy 3 9
3.2 Externalities 4 3
3.3 Public Goods 5 1
3.4 Markets 5 2
3.5 Market Dynamics 5 5
3.6 Risk and Uncertainty 6 2
4 Core Welfare Modeling Factors 6 7
4.1 Utility 67
4.2 Valuing Life and Well-Being 1 07
4.3 Demand 1 09
4.4 Shocks 1 16
4.5 Substitutes, Complements, and Elasticity 1 18
4.6 Trade and Exchange 1 19
4.7 Surplus 1 21
viii Contents
4.8 Inequality 1 26
4.9 Welfare 1 30
5 Current Topics in Electricity 1 41
5.1 Physical Characterization of Electricity 1 41
5.2 Measurement of Probability in Electricity 1 50
5.3 The Primary Importance of Data in the Electricity
System 1 51
5.4 Footprints of Consumed Electricity 1 57
5.5 Health, Morbidity, Mortality, Amenity, and
Fuel Poverty 1 65
5.6 Methods of Redistribution of Wealth in Electricity 1 75
5.7 The Future of Universal Service 1 84
5.8 Consumer Behavior 1 86
5.9 Tariffs, Socialization, Cross Subsidy, Consumer
Protection, and Cost Reflectivity 1 89
5.10 Contracts, Rules, and Rights in Energy 1 95
5.11 Taxes and Incentives in Infrastructure Build 1 96
6 Conclusion 1 99
6.1 The Felicific Calculus 1 99
6.2 Utility Functions 2 00
6.3 Welfare and Inequality Functions 2 00
6.4 Probability and Uncertainty 2 00
6.5 Sanctity of Contract 2 01
6.6 Fuel Poverty 2 01
6.7 Data 2 02
6.8 Consumer Segmentation 202
6.9 Behavior 2 03
6.10 Discounting the Future 2 03
6.11 Electricity as a Public Good 2 03
7 Technical Appendices 2 05
7.1 Shocks 2 05
7.2 Utility, Demand Functions, and Shocks 2 09
7.3 Welfare 2 18
7.4 Segmentation and Proxies 2 28
Notes 235
References 2 43
Author Index 2 55
Subject Index 259
Figures
2.1 The changing paradigm of power generation and
demand 8
2.2 The result of mutual mistrust between the state and
corporate sectors 8
2.3 Centralized/decentralized paradigm with a normative
or positive political approach 9
2.4 Political-economic axis of primacy of contract
or distribution 9
2.5 The effect of the spectrum of state expropriation 1 9
2.6 The effect of precedent on the changes to the rules 2 3
2.7 Raising tax/levy revenue, disbursing the revenue, and
receiving the benefit 3 1
2.8 Satiation in heat but lesser concavity in the utility of
health with wealth 3 7
3.1 Characterization of consumer segments 4 1
3.2 Stylized forms for the distribution of wealth 4 2
3.3 Lorenz representation of the distribution of wealth 4 2
3.4 Parade method of ranking incomes 4 3
3.5 Application of the Pigou tax for constant
pollution cost 4 4
3.6 Application of the Pigou tax for convex pollution cost 4 6
3.7 Setting the emission tax or the volume cap 4 8
3.8 Asymmetry of willingness to pay and willingness to
accept for a bad 4 9
3.9 The convexity of the value of a discount bond 6 0
3.10 The drift of forward prices in relation to price volatility
and the market cost of price risk 6 1
3.11 Narrowing the uncertainty of forward interest rates 65
3.12 Quantification of uncertainty 6 5
4.1 Utility for consumption of a single good 6 8
4.2 Development of utility in terms of increasing income
that is spent on goods 6 9
x Figures
4.3 Path independence of utility with constant marginal
utility of money 7 0
4.4 Affine transformations of the utility function 7 1
4.5 Consumers with different tastes and endowments 7 1
4.6 Threshold point for negative utility 7 2
4.7 Hierarchy of physiological needs 7 3
4.8 Future utility functions 7 9
4.9 Risk aversion 8 5
4.10 Risk-neutral example in the KT approach 8 5
4.11 The difference between objective and subjective
likelihood 87
4.12 Utility possibilities 8 9
4.13 Utility effect on discounting 9 4
4.14 Splining the interest rate regimes across tenors 1 02
4.15 The KMV visualization of the equity value of the firm 1 05
4.16 Utility-wealth function for a good and the associated
inverse demand function 1 09
4.17 Budget constraint for nonlinear purchase costs 1 10
4.18 Willingness to pay expressed as an
indifference function 1 10
4.19 Indifference curves expressed as income equivalents 1 11
4.20 Indifference functions for two available goods 1 11
4.21 With constant marginal utility of money, “rich” and
“poor” have the same demand functions 1 12
4.22 Consumption change from increase in income and
decrease in price 1 12
4.23 Low income high consuming–electricity depicted
as an inferior good 1 12
4.24 (A) Engel functions for luxury and inferior goods
(B) Stylized electricity consumption function 1 13
4.25 Representation of the heat and electronics use for
electricity in relation to spending. 1 14
4.26 Change in consumption profile at the point of
employment 1 14
4.27 Stylized change in electricity consumption in relation
to income 1 15
4.28 Aggregate electricity demand for two heterogeneous
consumers 1 15
4.29 Iso-utility functions 1 18
4.30 The Edgeworth box and the core of the economy 1 20
4.31 Second Theorem of Welfare Economics 1 21
4.32 First Theorem of Welfare Economics 1 21
Figures xi
4.33 Marshallian Consumer’s Surplus 1 22
4.34 Consumer’s surplus for an intermediate good that
delivers three goods 1 23
4.35 (A) Indifference functions for “rich” and “poor”
(B) One measure of gain from purchasing good 2 1 24
4.36 Altered consumption following income expansion 1 25
4.37 The effect of decrease in price 1 26
4.38 Depiction of the change in surpluses following a price
reduction 1 26
4.39 The Lorenz and Gini functions for inequality 1 28
4.40 Representation of distribution of wealth among
three people 1 29
4.41 Marginal revenue from increased volume 1 35
4.42 Ramsey pricing with overbuilt capacity 1 36
4.43 Ramsey pricing with increasing returns-to-scale
in capacity 1 37
4.44 Regressive effects of Ramsey pricing 1 38
5.1 The electrical system under the centralized
generation model 1 41
5.2 Depiction of the latency of demand in electricity 1 46
5.3 Examples of energy latency 147
5.4 Electricity content labeling 1 58
5.5 The power generation cost stack and nuclear labels 1 60
5.6 The Hills and Boardman fuel poverty indicators 1 71
5.7 Fuel poverty on the Boardman definition and
expenditure fuel poverty 1 72
5.8 Targeting the fuel poor with benefits 1 73
5.9 (A) QALY gain from spending on warmth
(B) The effect of increased available healthcare
spending 1 75
5.10 Methods of cost collection, disbursement, and
delivery of energy measures 1 77
5.11 Flow-through to consumers according to different
supplier obligation mechanisms 1 78
5.12 Application of a Pigou can leave the market-clearing
price for power unchanged if a cap-and-trade
system exists 1 80
5.13 Utility of power for the laundry cycle 1 87
5.14 Systems dynamics loops for cross subsidy and energy
efficiency 1 89
5.15 Lumpy investment in networks must precede the
demand growth 1 90