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The Value of Transmission in Electricity Markets: Evidence from a Nuclear Power Plant Closure

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  • Lucas Davis
  • Catherine Hausman

Abstract

Reliable estimates of the value of electricity transmission are critical if these heavily-regulated investments are to be made cost-effectively. In this paper, we exploit the abrupt closure of the San Onofre Nuclear Generating Station (SONGS) in February 2012. During the previous decade, SONGS had produced about 8% of the electricity generated in California, so its closure had a pronounced impact on the wholesale market, requiring large and immediate increases in generation from other sources. We find that in the months following the closure, almost all of the lost generation from SONGS was met by natural gas plants inside California at an average cost of almost $68,000 per hour. During high demand hours, we find that as much as 75% of the lost generation was met by plants located in the southern part of the state. Although lower-cost production was available elsewhere, transmission constraints and other physical limitations of the grid severely limited the ability of other producers to sell into the southern California market. These constraints also made it potentially more profitable for certain plants to exercise market power, and we find evidence consistent with one company acting non-competitively. Overall, the constraints increased generation costs by an average of $4,500 per hour, implying that the value of additional transmission capacity is about $380 million.

Suggested Citation

  • Lucas Davis & Catherine Hausman, 2014. "The Value of Transmission in Electricity Markets: Evidence from a Nuclear Power Plant Closure," NBER Working Papers 20186, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:20186
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    File URL: http://www.nber.org/papers/w20186.pdf
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    References listed on IDEAS

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    1. Lucas W. Davis, 2012. "Prospects for Nuclear Power," Journal of Economic Perspectives, American Economic Association, vol. 26(1), pages 49-66, Winter.
    2. Borenstein, Severin & Bushnell, James, 1999. "An Empirical Analysis of the Potential for Market Power in California's Electricity Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 47(3), pages 285-323, September.
    3. Banerjee, Abhijit & Duflo, Esther & Qian, Nancy, 2012. "On the Road: Access to Transportation Infrastructure and Economic Growth in China," CEPR Discussion Papers 8874, C.E.P.R. Discussion Papers.
    4. 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.
    5. Koichiro Ito, 2014. "Do Consumers Respond to Marginal or Average Price? Evidence from Nonlinear Electricity Pricing," American Economic Review, American Economic Association, vol. 104(2), pages 537-563, February.
    6. Severin Borenstein & James. Bushnell & Steven Stoft, 2000. "The Competitive Effects of Transmission Capacity in A Deregulated Electricity Industry," RAND Journal of Economics, The RAND Corporation, vol. 31(2), pages 294-325, Summer.
    7. Steven L. Puller, 2007. "Pricing and Firm Conduct in California's Deregulated Electricity Market," The Review of Economics and Statistics, MIT Press, vol. 89(1), pages 75-87, February.
    8. Severin Borenstein and Ryan Kellogg, 2014. "The Incidence of an Oil Glut: Who Benefits from Cheap Crude Oil in the Midwest?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1).
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    Cited by:

    1. Catherine Hausman & Ryan Kellogg, 2015. "Welfare and Distributional Implications of Shale Gas," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 46(1 (Spring), pages 71-139.

    More about this item

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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