estimating ENERGY rationing costs on General equilibrium environment with compensating variation Presented by Edson Gonçalves Getulio vargas foundation – fgv Center for regulation in infrastructure – CERI Research & Development program of National Energy Commission – ANEEL IAEE – 2017 Singapore

GENERAL EQUILIBRIUM & OTHER MODELS roadmap OVERVIEW GENERAL EQUILIBRIUM & OTHER MODELS THE MODEL RESULTS CONCLUSIONS & POLICY IMPLICATIONS

overview The Brazilian electricity sector is characterized by a hydrothermal composition and centralized operational procedures, including the dispatch of energy sources available. Among the fundamental information needed for planning of expansion and operation the cost of rationing or energy deficit cost plays a central role. In summary, it represents the maximum amount that could be attributed to a new venture able to avoid power outages or, more generally, the economic cost of shortage or lack of availability of electricity.

overview This parameter is also used in other fundamental processes, being an essential reference to design public policies related to energy in Brazil. In this context, the main goal of this research is to develop and implement new methodologies for energy deficit cost estimation, capable to be used by policy makers involved. The Research is part of Research & Development program of National Energy Commission (ANEEL) and involves FGV – CERI (Center for Regulation & Infrastructure), PSR and Thymos

General equilibrium & other models The loss of gross domestic product (GDP) caused by electricity supply shocks, such as an energy rationing, are typically estimated using simple econometric models, which implicitly assume these events do not change the correlation between GDP variations and energy consumption. Similar hypothesis is made by the class of models that use input-output matrices, since this approach assumes sectoral relations and prices are not affected by the events it intends to evaluate. However, economic theory suggests these assumptions are too strong: firms’ and consumers’ optimal responses after an electricity supply shock may differ from their consumption behavior in normal times.

General equilibrium & other models Consequently, the electricity supply shocks cause structural breaks in econometric and input-output models. But if the events whose effects these methods intend to evaluate change them, how can they be of any help? The solution to this problem can be found in economic theory (Lucas, 1976): one must estimate the theoretical parameters of the firms’ and consumers’ optimization problems and find their theoretical policy reaction functions. In practice, a general equilibrium model is needed, so that prices, wages, production, employment, and GDP are simultaneosly determined.

The model – basic structure GENERAL EQUILIBRIUM JOINT SOLUTION OF: FIRMS PROBLEM Maximize Profits CONSUMERS PROBLEM: Maximize Utility Solution: demand = supply for all the markets “MARKET CLEARING” Calibration of parameters with real data Counterfactual Exercise to measure the effects of an energy rationing: GDP variation and Compensating variation approaches

Consumers – utility Maximization

Firms – Profit maximization

Compensating Variation – classical concept

Compensating Variation – Aplicattion to the problem Benchmark Equilibrium Cb: benchmark consumption hb: benchmark working hours ub: benchmark utility Rationing Equilibrium Cr: consumption under rationing hr: working hours under rationing hr: utility under rationing How much should the representative agent receive (in terms of consumption) so that its utility is the same?

Compensating Variation – Aplicattion to the problem How much should the representative agent receive (in terms of consumption) so that its utility is the same? is the compensating variation in terms of consumption

COMPENSATING VARIATION results In terms of 2016 prices (R$/MWh): 1º level (until 5%): 14.104 2º level (5% to 10%):14.104 3º level (10% to 20%): 14.104 4º level (> 20%):14.104 1º level (until 5%): 7.028 2º level (5% to 10%): 9.338 3º level (10% to 20%): 13.018 4º level (> 20%): 18.858 CGE COMPENSATING VARIATION GDP VARIATION

Results – Some comparisons * Current Model under more recent data for brazilian national accounts ** Official Numbers – current model under data available in 1988 anda just the effects of inflation (IGP– DI)

Conclusions & Policy implications General equilibrium models provide an adequate framework for evaluating energy policy and supply shocks. In particular, they offer a natural estimate for the cost of an electricity rationing, allowing its comparison with the economic cost of an electricity price increase. Current Model in Brazil uses Input- Output Matrix and other national accounts data – no economic structure Matter for further research: Dynamic analysis ; Refinement of the energy market structure; Other production functions (ie Cobb- Douglas); Effects of rationing diferent groups of consumers

Center for Regulation in Infrastructure – CERI / FGV Thank you Edson Gonçalves edson.goncalves@fgv.br Center for Regulation in Infrastructure – CERI / FGV http://ceri.fgv.br/