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Opportunity Cost Pass-through from Fossil Fuel Market Prices to Procurement Costs of the U.S. Power Producers

Author

Listed:
  • Yin Chu

    () (Zhongnan University of Economics and Law)

  • J. Scott Holladay

    () (Department of Economics, University of Tennessee)

  • Jacob LaRiviere

    () (Department of Economics, University of Tennessee and Microsoft)

Abstract

This paper investigates the transmission of fossil fuel commodity spot market price changes to procurement costs of U.S. power producers. We measure and compare the speed and magnitude with which spot prices predict procurement costs using restricted access fuel price data. Natural gas spot prices are quickly reflected in procurement costs. Coal spot prices offer very little predictive power to coal procurement costs. Although not causal, the empirical results also show differences across regulatory status. These findings may have implications for the electricity market deregulation literature that creates marginal cost curves as a competitive benchmark.

Suggested Citation

  • Yin Chu & J. Scott Holladay & Jacob LaRiviere, 2017. "Opportunity Cost Pass-through from Fossil Fuel Market Prices to Procurement Costs of the U.S. Power Producers," Working Papers 2017-02, University of Tennessee, Department of Economics.
  • Handle: RePEc:ten:wpaper:2017-02
    as

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    File URL: http://web.utk.edu/~jhollad3/RePEc/2017-02.pdf
    File Function: First version, 2017
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    References listed on IDEAS

    as
    1. Steve Cicala, 2015. "When Does Regulation Distort Costs? Lessons from Fuel Procurement in US Electricity Generation," American Economic Review, American Economic Association, vol. 105(1), pages 411-444, January.
    2. Chan, H. Ron & Fell, Harrison & Lange, Ian & Li, Shanjun, 2017. "Efficiency and environmental impacts of electricity restructuring on coal-fired power plants," Journal of Environmental Economics and Management, Elsevier, vol. 81(C), pages 1-18.
    3. Pinelopi Koujianou Goldberg & Michael M. Knetter, 1997. "Goods Prices and Exchange Rates: What Have We Learned?," Journal of Economic Literature, American Economic Association, vol. 35(3), pages 1243-1272, September.
    4. Di Maria, Corrado & Lange, Ian & van der Werf, Edwin, 2014. "Should we be worried about the green paradox? Announcement effects of the Acid Rain Program," European Economic Review, Elsevier, vol. 69(C), pages 143-162.
    5. Jeffrey M Wooldridge, 2010. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232588, March.
    6. Adachi, Takanori & Ebina, Takeshi, 2014. "Cost pass-through and inverse demand curvature in vertical relationships with upstream and downstream competition," Economics Letters, Elsevier, vol. 124(3), pages 465-468.
    7. repec:ucp:jaerec:doi:10.1086/692071 is not listed on IDEAS
    8. Christopher R. Knittel & Ben S. Meiselman & James H. Stock, 2017. "The Pass-Through of RIN Prices to Wholesale and Retail Fuels under the Renewable Fuel Standard," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 4(4), pages 1081-1119.
    9. Frieder Mokinski & Nikolas Wölfing, 2014. "The effect of regulatory scrutiny: Asymmetric cost pass-through in power wholesale and its end," Journal of Regulatory Economics, Springer, vol. 45(2), pages 175-193, April.
    10. Christopher R. Knittel & Konstantinos Metaxoglou & Andre Trindade, 2015. "Natural Gas Prices and Coal Displacement: Evidence from Electricity Markets," NBER Working Papers 21627, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Brett Jordan & Ian A. Lange & Joshua Linn, 2018. "Coal Demand, Market Forces, and US Coal Mine Closures," CESifo Working Paper Series 6988, CESifo Group Munich.

    More about this item

    Keywords

    electric power industry; fossil fuel market; pass-through; deregulation; asymmetric price adjustment;

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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