1. 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

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

3. 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.

4. 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

5. 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.

6. 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.

7. 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

8. Consumers – utility Maximization

9. Firms – Profit maximization

10. Compensating Variation – classical concept

11. 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?

12. 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

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

14. 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)

15. 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

16. Center for Regulation in Infrastructure – CERI / FGV
Thank you
Edson Gonçalves
Center for Regulation in Infrastructure – CERI / FGV