In the last steps, you have seen the different building blocks and how they can be combined to design a firm-oriented model. Now let’s apply this knowledge to analyse how firms react to price signals.

So far, all our model exercises were based on the assumption that some central planner decides about investments in the different technologies and which technologies are to be used first. In reality, such decisions are rarely made by one planner but rather by a number of independent firms. The best that we can do is to influence these firms via prices, taxes, and subsidies. In this model exercise, you can try out such an indirect steering of energy supply.

There are five firms in this model, each one uses one technology (coal-fired power plants, gas-fired power plants, nuclear power, wind, PV). Each of these firms decides how much it produces and some of them (coal and gas) can also decide how much effort they exert in reducing their CO₂-emissions.

To steer the behaviour of these firms, you have five instruments: a tax on CO₂, a deposit for nuclear accidents, a subsidy for electricity produced by wind power, a subsidy for electricity produced by PV, and the price of electricity.

Note that consumers also react to electricity prices. They do not only pay the price that you set but also have to pay a surcharge that is used to pay the two subsidies. And your choice could result in a setting with under- or oversupply on the market

Try out such indirect steering. In particular, see how firms react to your choices and what costs per unit of electricity result.

Note: If you want to keep a certain result for later use we suggest that you make a screenshot (Command-Shift-3 for Mac or CTRL+PrtScn for Windows) and download it.

Exercise

Steering firms: prices