Selected topics in capacity and sustainability investments from the perspectives of pricing and carbon emission

Abstract

As a result of global climate change and oil price volatility, energy efficiency and environmental sustainability have become top policy priorities around the world. Meanwhile, the global energy demand may grow by more than one-third after about twenty years, with the expectation that the global electricity demand will continue to grow more strongly than any other final form of energy. So it is crucial to find ways to achieve efficient capacity investments for electricity and efficient environmental sustainability investments for products. On the other hand, an efficient pricing mechanism of electricity can facilitate efficient capacity investment for electricity, and reducing carbon emission is essential to achieve environmental sustainability. Therefore, in this thesis we study capacity and sustainability investments from the perspectives of pricing and carbon emission. Three fundamental topics, which can be considered as foundations for future research, are studied in this thesis. In the first topic, we consider the determination of the optimal capacity and pricing policies for an electricity company. The time of electricity usage consists of two periods, namely the non-peak period and the peak period. Two technologies are considered to generate electricity, where the first technology is used to generate electricity for the demands in both periods and the second technology is used to generate electricity only for the demand in the peak period. The company offers customers two tariffs, namely the flat rate(FR) tariff and time-of-use(TOU) tariff. Under the FR tariff, customers pay a flat price for electricity consumption in both periods. Under the TOU tariff, customers pay a high price and a low price for electricity consumption in the peak period and non-peak period, respectively. We first study a model with price inelasticity of total demand. Customers who use the TOU tariff may shift some electricity consumption from the peak period to the non-peak period to take advantage of the lower price in the latter period. We apply a Stackelberg game to study this model, where the electricity company, acting as the Stackelberg leader, decides the capacity investment and prices of electricity. The customers under the TOU tariff, acting as Stackelberg followers, decide the amount of electricity consumption to shift from the peak period to the non-peak period, given the prices of electricity. We then study a model with price elasticity of demand. The optimal capacity and pricing policies for the electricity company under both models are derived. By introducing the TOU tariff to customers, the electricity company can obtain more profit while customers can save electricity cost. We also analyze the effects of the proportion of the customers using the TOU tariff and discuss the managerial implications of the findings. In the second topic, we study the time-of-use tariff for an electricity company with stochastic shifted consumption. Similar to the first topic, the electricity company uses two technologies to generate electricity and offers both the FR tariff and TOU tariff to the customers. We consider a scenario that the amount of shifted consumption is uncertain. The optimal capacity investment decisions and the optimal pricing decisions for the electricity company are obtained. We find that shifting too much consumption from the peak period to the non-peak period may not be optimal to the electricity company. Furthermore, we study the effects of the demands, market size, proportion of customers using the TOU tariff and the cost parameters, and discuss the managerial implications of the findings. Carbon emission abatement is a hot topic in environmental sustainability, and cap-and-trade regulation is regarded as an effective way to reduce the carbon emission. Besides, according to the real industrial practices, an environmental sustainable product usually involves decreasing carbon emission in the production process and increasing the market demand. Therefore, in the third topic, we study the environmental sustainability investment in products with emission regulation considerations. Decentralized and centralized supply chains are considered. We first examine the order quantity of the retailer and sustainability investment of the manufacturer for the decentralized supply chain with one retailer and one manufacturer. Then, we study the centralized supply chain and derive the optimal production quantity and optimal sustainability investment for the whole supply chain. In both supply chains, the sustainability investment efficiency has a significant impact on the optimal solutions. Furthermore, we conduct numerical analyses and find surprisingly that the order quantity may be increasing in the wholesale price, which is due to the effects of environmental sustainability and carbon emission. Moreover, we investigate the achievability of supply chain coordination by various contracts, and find that only revenue sharing contract can coordinate the supply chain whereas the buyback contract and two-part tariff contract cannot achieve the coordination.