Life cycle costs and electricity market equilibrium: A policy assessment for India

Energy production and consumption cause unintended impacts. Their exclusion by the market leads to suboptimal resource allocations. Conventionally, the market correction is proposed through Pigouvian taxes or Coasian bargaining interventions that shift the equilibrium. The long-life of energy assets and their external impacts need interventions along the future time-path to correct the dynamic equilibrium. The energy modeling literature includes interventions that internalize externalities at the point of energy use, but miss other externalities of energy value chain such as land degradation and health damages from local pollutants (SO2, NOx) in coal mining, impacts on ecosystem during oil and gas exploration and nuclear waste disposal. The life cycle analysis is deployed for full accounting of externalities of energy use for electricity production. A “bottom-up” partial equilibrium modeling framework ANSWER-MARKAL is used to internalize the external costs from the static life cycle analysis to generate dynamic energy system equilibrium and to make comparative policy assessment for India’s energy system.