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Imperfect Markets versus Imperfect Regulation in U.S. Electricity Generation

Listed author(s):
  • Steve Cicala

This paper measures changes in electricity generation costs caused by the introduction of market mechanisms to determine output decisions in service areas that were previously using command-and-control-type operations. I use the staggered transition to markets from 1999- 2012 to evaluate the causal impact of liberalization using a nationwide panel of hourly data on electricity demand and unit-level costs, capacities, and output. To address the potentially confounding effects of unrelated fuel price changes, I use machine learning methods to predict the allocation of output to generating units in the absence of markets for counterfactual production patterns. I find that markets reduce production costs by $3B per year by reallocating output among existing power plants: Gains from trade across service areas increase by 20% based on a 10% increase in traded electricity, and costs from using uneconomical units fall 20% from a 10% reduction in their operation.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 23053.

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Date of creation: Jan 2017
Handle: RePEc:nbr:nberwo:23053
Note: EEE IO
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  1. 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.
  2. 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.
  3. Catherine Hausman & Ryan Kellogg, 2015. "Welfare and Distributional Implications of Shale Gas," NBER Working Papers 21115, National Bureau of Economic Research, Inc.
  4. Linn, Joshua & Anna Muehlenbachs, Lucija & Wang, Yshuang, 2014. "How Do Natural Gas Prices Affect Electricity Consumers and the Environment?," Discussion Papers dp-14-19, Resources For the Future.
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