IDEAS home Printed from https://ideas.repec.org/a/eee/indorg/v89y2023ics0167718723000358.html

Market dynamics and investment in the electricity sector

Author

Listed:
  • Cullen, Joseph A.
  • Reynolds, Stanley S.

Abstract

A transition to a low carbon future will include a medium-to-long run period in which intermittent renewables co-exist with conventional fossil fuel electricity generators. Fossil fuel generators have frequent startups and shut-downs during the transition. A dynamic competition model is developed that allows for costly cycling of conventional generators. We analyze long run effects of renewable subsidies and carbon prices in the Electric Reliability Council of Texas system using the dynamic model. Accounting for costly generator cycling leads to large changes in equilibrium outcomes and changes policy predictions. The dynamic model predicts higher subsidies or carbon taxes are required to achieve CO2 reduction targets compared to a static model without costly generator cycling. The dynamic model predicts the cost of CO2 reduction is 40 - 80% greater than the static model prediction. The dynamic model predicts a much larger gap between CO2 reduction costs for carbon taxes and renewable subsidies; $303 million/year, compared to a static model prediction of $209 million/year.

Suggested Citation

  • Cullen, Joseph A. & Reynolds, Stanley S., 2023. "Market dynamics and investment in the electricity sector," International Journal of Industrial Organization, Elsevier, vol. 89(C).
    • Handle: RePEc:eee:indorg:v:89:y:2023:i:c:s0167718723000358
    DOI: 10.1016/j.ijindorg.2023.102954
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0167718723000358
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.ijindorg.2023.102954?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Lucas, Robert E, Jr & Prescott, Edward C, 1971. "Investment Under Uncertainty," Econometrica, Econometric Society, vol. 39(5), pages 659-681, September.
    2. repec:aen:journl:ej41-1-newbery is not listed on IDEAS
    3. Frank A. Wolak, 2007. "Quantifying the supply-side benefits from forward contracting in wholesale electricity markets," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(7), pages 1179-1209.
    4. repec:aen:journl:ej35-3-02 is not listed on IDEAS
    5. Mar Reguant, 2014. "Complementary Bidding Mechanisms and Startup Costs in Electricity Markets," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 81(4), pages 1708-1742.
    6. Robert H. Patrick & Frank A. Wolak, 2001. "Estimating the Customer-Level Demand for Electricity Under Real-Time Market Prices," NBER Working Papers 8213, National Bureau of Economic Research, Inc.
    7. repec:aen:journl:ej34-1-07 is not listed on IDEAS
    8. Gautam Gowrisankaran & Stanley S. Reynolds & Mario Samano, 2016. "Intermittency and the Value of Renewable Energy," Journal of Political Economy, University of Chicago Press, vol. 124(4), pages 1187-1234.
    9. Richard Green & Nicholas Vasilakos, 2011. "The Long-term Impact of Wind Power on Electricity Prices and Generating Capacity," Working Paper series, University of East Anglia, Centre for Competition Policy (CCP) 2011-04, Centre for Competition Policy, University of East Anglia, Norwich, UK..
    10. Richard Ericson & Ariel Pakes, 1995. "Markov-Perfect Industry Dynamics: A Framework for Empirical Work," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 62(1), pages 53-82.
    11. Pindyck, Robert S., 2019. "The social cost of carbon revisited," Journal of Environmental Economics and Management, Elsevier, vol. 94(C), pages 140-160.
    12. Severin Borenstein & James B. Bushnell & Frank A. Wolak, 2002. "Measuring Market Inefficiencies in California's Restructured Wholesale Electricity Market," American Economic Review, American Economic Association, vol. 92(5), pages 1376-1405, December.
    13. Johnsen, Tor Arnt, 2001. "Demand, generation and price in the Norwegian market for electric power," Energy Economics, Elsevier, vol. 23(3), pages 227-251, May.
    14. LaRiviere, Jacob & Lyu, Xueying, 2022. "Transmission constraints, intermittent renewables and welfare," Journal of Environmental Economics and Management, Elsevier, vol. 112(C).
    15. Catherine D. Wolfram, 1999. "Measuring Duopoly Power in the British Electricity Spot Market," American Economic Review, American Economic Association, vol. 89(4), pages 805-826, September.
    16. Rafael Rob, 1991. "Learning and Capacity Expansion under Demand Uncertainty," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(4), pages 655-675.
    17. Joseph Cullen, 2013. "Measuring the Environmental Benefits of Wind-Generated Electricity," American Economic Journal: Economic Policy, American Economic Association, vol. 5(4), pages 107-133, November.
    18. Tatyana Deryugina & Alexander MacKay & Julian Reif, 2020. "The Long-Run Dynamics of Electricity Demand: Evidence from Municipal Aggregation," American Economic Journal: Applied Economics, American Economic Association, vol. 12(1), pages 86-114, January.
    19. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-670, May.
    20. Kevin Novan, 2015. "Valuing the Wind: Renewable Energy Policies and Air Pollution Avoided," American Economic Journal: Economic Policy, American Economic Association, vol. 7(3), pages 291-326, August.
    21. Ali Hortaçsu & Steven L. Puller, 2008. "Understanding strategic bidding in multi‐unit auctions: a case study of the Texas electricity spot market," RAND Journal of Economics, RAND Corporation, vol. 39(1), pages 86-114, March.
    22. Troy, Niamh & Denny, Eleanor & O'Malley, Mark, 2010. "Base-load cycling on a system with significant wind penetration," MPRA Paper 34848, University Library of Munich, Germany.
    23. repec:aen:eeepjl:1_2_a01 is not listed on IDEAS
    24. Sensfuß, Frank & Ragwitz, Mario & Genoese, Massimo, 2008. "The merit-order effect: A detailed analysis of the price effect of renewable electricity generation on spot market prices in Germany," Energy Policy, Elsevier, vol. 36(8), pages 3076-3084, August.
    25. repec:aen:journl:ej40-si1-ritz is not listed on IDEAS
    26. Fell, Harrison & Linn, Joshua, 2013. "Renewable electricity policies, heterogeneity, and cost effectiveness," Journal of Environmental Economics and Management, Elsevier, vol. 66(3), pages 688-707.
    27. repec:aen:journl:ej35-si1-08 is not listed on IDEAS
    28. Bushnell, James, 2010. "Building blocks: investment in renewable and non-renewable technologies," ISU General Staff Papers 201005250700001113, Iowa State University, Department of Economics.
    29. Harrison Fell & Daniel T. Kaffine, 2014. "A one-two punch: Joint effects of natural gas abundance and renewables on coal-fired power plants," Working Papers 2014-10, Colorado School of Mines, Division of Economics and Business.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Mardones, Cristian, 2023. "Economic and environmental effects of financing subsidies for non-conventional renewable energies with a carbon tax – A comparison of intersectoral models," Renewable Energy, Elsevier, vol. 217(C).
    2. R. Andrew Butters & Jackson Dorsey & Gautam Gowrisankaran, 2025. "Soaking up the Sun: Battery Investment, Renewable Energy, and Market Equilibrium," Econometrica, Econometric Society, vol. 93(3), pages 891-927, May.
    3. Li, Haoyang & Lin, Wen, 2023. "Cheaper solar, cleaner grid?," Energy Economics, Elsevier, vol. 127(PB).
    4. Chu, Yin & Gao, Juanxia & Li, Haoyang, 2023. "Wind power expansion and regional allocative efficiency among fossil-fuel electricity generators," International Journal of Industrial Organization, Elsevier, vol. 91(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bohland, Moritz & Schwenen, Sebastian, 2022. "Renewable support and strategic pricing in electricity markets," International Journal of Industrial Organization, Elsevier, vol. 80(C).
    2. LaRiviere, Jacob & Lyu, Xueying, 2022. "Transmission constraints, intermittent renewables and welfare," Journal of Environmental Economics and Management, Elsevier, vol. 112(C).
    3. David P. Brown & Andrew Eckert, 2018. "Analyzing the Impact of Electricity Market Structure Changes and Mergers: The Importance of Forward Commitments," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 52(1), pages 101-137, February.
    4. Carlos Suarez, 2021. "Mixed Oligopoly and Market Power Mitigation: Evidence from the Colombian Wholesale Electricity Market," IREA Working Papers 202101, University of Barcelona, Research Institute of Applied Economics, revised Jan 2021.
    5. Holladay, J. Scott & LaRiviere, Jacob, 2017. "The impact of cheap natural gas on marginal emissions from electricity generation and implications for energy policy," Journal of Environmental Economics and Management, Elsevier, vol. 85(C), pages 205-227.
    6. Brown, David P. & Eckert, Andrew & Silveira, Douglas, 2023. "Screening for collusion in wholesale electricity markets: A literature review," Utilities Policy, Elsevier, vol. 85(C).
    7. Brown, David P. & Eckert, Andrew, 2021. "Analyzing firm behavior in restructured electricity markets: Empirical challenges with a residual demand analysis," International Journal of Industrial Organization, Elsevier, vol. 74(C).
    8. John J. García Rendón & Alex F. P�rez-Libreros, 2019. "El precio spot de la electricidad y la inclusión de energía renovable no convencional: evidencia para Colombia," Documentos de Trabajo de Valor Público 17393, Universidad EAFIT.
    9. Perez, Alex & Garcia-Rendon, John J., 2021. "Integration of non-conventional renewable energy and spot price of electricity: A counterfactual analysis for Colombia," Renewable Energy, Elsevier, vol. 167(C), pages 146-161.
    10. Mar Reguant, 2018. "The Efficiency and Sectoral Distributional Implications of Large-Scale Renewable Policies," NBER Working Papers 24398, National Bureau of Economic Research, Inc.
    11. Yang, Yuting, 2022. "Electricity interconnection with intermittent renewables," Journal of Environmental Economics and Management, Elsevier, vol. 113(C).
    12. Ciarreta, Aitor & Espinosa, Maria Paz & Pizarro-Irizar, Cristina, 2017. "Has renewable energy induced competitive behavior in the Spanish electricity market?," Energy Policy, Elsevier, vol. 104(C), pages 171-182.
    13. David P. Brown & David E. M. Sappington, 2023. "Market Structure, Risk Preferences, and Forward Contracting Incentives," Journal of Industrial Economics, Wiley Blackwell, vol. 71(4), pages 1146-1202, December.
    14. Fabra, Natalia & de Frutos, Maria-Angeles, 2008. "On the Impact of Forward Contract Obligations in Multi-Unit Auctions," CEPR Discussion Papers 6756, C.E.P.R. Discussion Papers.
    15. David P. Brown & Derek E. H. Olmstead, 2017. "Measuring market power and the efficiency of Alberta's restructured electricity market: An energy-only market design," Canadian Journal of Economics, Canadian Economics Association, vol. 50(3), pages 838-870, August.
    16. Jorge Balat & Juan E. Carranza & Juan D. Martin, 2015. "Dynamic and Strategic Behavior in Hydropower-Dominated Electricity Markets: Empirical Evidence for Colombia," Borradores de Economia 886, Banco de la Republica de Colombia.
    17. Brown, David P. & Eckert, Andrew & Shaffer, Blake, 2023. "Evaluating the impact of divestitures on competition: Evidence from Alberta’s wholesale electricity market," International Journal of Industrial Organization, Elsevier, vol. 89(C).
    18. David P. Brown & Andrew Eckert, 2017. "Electricity market mergers with endogenous forward contracting," Journal of Regulatory Economics, Springer, vol. 51(3), pages 269-310, June.
    19. Bahramian, Pejman & Jenkins, Glenn P. & Milne, Frank, 2021. "The displacement impacts of wind power electricity generation: Costly lessons from Ontario," Energy Policy, Elsevier, vol. 152(C).
    20. Brehm, Paul A. & Zhang, Yiyuan, 2021. "The efficiency and environmental impacts of market organization: Evidence from the Texas electricity market," Energy Economics, Elsevier, vol. 101(C).

    More about this item

    Keywords

    ;
    ;
    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:indorg:v:89:y:2023:i:c:s0167718723000358. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/505551 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.