Recent ucei_csem_rw items

Do Americans Consume Too Little Natural Gas? An Empirical Test of Marginal Cost Pricing

Tue, 22 Dec 2009 00:00:00 +0000

A standard result in regulation is that efficiency requires that marginal prices be set equal to marginal costs. This paper performs an empirical test of marginal cost pricing in the natural gas distribution market in the United States during the period 1989-2008. For all 50 states we reject the null hypothesis of marginal cost pricing. Departures from marginal cost pricing are particularly severe in residential and commercial markets, where we find average markups of over 40%. Based on conservative estimates of the price elasticity of demand these distortions impose hundreds of millions of dollars of annual welfare loss. Moreover, the current pricing schedules are an important pre-existing distortion which should be taken into account when evaluating carbon taxes and other policies aimed at addressing external costs. Current markups for residential and commercial customers are already equivalent to a tax of over $200 per metric ton of carbon, considerably higher than the range...

Doing Well By Doing Good? Green Office Buildings

Wed, 16 Sep 2009 00:00:00 +0000

This paper provides the first credible evidence on the economic value of the certification of “green buildings” – value derived from impersonal market transactions rather than engineering estimates. For some 10,000 subject and control buildings, we match publicly available information on the addresses of Energy Star and LEED-rated office buildings to the characteristics of these buildings, their rental rates and selling prices. We find that buildings with a “green rating” command rental rates that are roughly three percent higher per square foot than otherwise identical buildings – controlling for the quality and the specific location of office buildings. Ceteris paribus, premiums in effective rents are even higher – above six percent. Selling prices of green buildings are higher by about 16 percent.

For the Energy-Star-certified buildings in this sample, we subsequently obtained detailed estimates of site and source energy usage from the U.S. Environmental Protection...

Explaining the Price of Voluntary Carbon Offsets

Wed, 16 Sep 2009 00:00:00 +0000

This paper investigates factors that explain the large variability in the price of voluntary carbon offsets. We estimate hedonic price functions using a variety of provider- and project-level characteristics as explanatory variables. We find that providers located in Europe sell offsets at prices that are approximately 30 percent higher than providers located in either North America or Australasia. Contrary to what one might expect, offset prices are generally higher, by roughly 20 percent, when projects are located in developing or least-developed nations. But this result does not hold for forestry-based projects. We find evidence that forestry-based offsets sell at lower prices, and the result is particularly strong when projects are located in developing or least-developed nations. Offsets that are certified under the Clean Development Mechanism or the Gold Standard, and therefore qualify for emission reductions under the Kyoto Protocol, sell at a premium of more than 30...

When it comes to Demand Response, is FERC its Own Worst Enemy?

Fri, 28 Aug 2009 00:00:00 +0000

The traditional approach to demand response of paying for a customer’s electricity consumption reductions relative to an administratively set baseline is currently being advocated by the Federal Energy Regulatory Commission (FERC) as a way to foster the participation of final consumers in formal wholesale markets. Although these efforts may lead to greater participation of final consumers in traditional demand response programs, they are likely to work against the ultimate goal of increasing the benefits that electricity consumers realize from formal wholesale electricity markets, because traditional demand response programs are likely to provide a less reliable product than generation resources. The moral hazard and adverse selection problems that reduce the reliability of the product provided by traditional demand response resources can be addressed by treating consumers and producers of electricity symmetrically in the wholesale market. Several suggestions are made for how...

Taxes and Trading versus Intensity Standards: Second-Best Environmental Policies with Incomplete Regulation (Leakage) or Market Power

Fri, 28 Aug 2009 00:00:00 +0000

This paper investigates whether an emissions tax (equivalent to an emissions cap) is the best policy in the presence of incomplete regulation (leakage) or market power by analyzing an intensity standard regulating emissions per unit of output. With no other market failures, an intensity standard is indeed inferior, although combining it with a consumption tax eliminates this inferiority. For incomplete regulation, I show that under certain conditions an intensity standard can dominate any emissions tax (including the optimal emissions tax). This dominance persists even with the addition of a consumption tax, which ameliorates output distortions and can sometimes help the intensity standard attain the first best (when an emissions tax/consumption tax combination cannot). Comparing intensity standards to output-based updating shows that the latter dominates because of its additional flexibility. Finally, I show that with market power an intensity standard can dominate the optimal...

Automobiles on Steroids: Product Attribute Trade-Offs and Technological Progress in the Automobile Sector

Fri, 14 Aug 2009 00:00:00 +0000

New car fleet fuel economy, weight and engine power have changed drastically since 1980. These changes represent both movements along and shifts in the "fuel economy/weight/engine power production possibilities frontier". This paper estimates the technological progress that has occurred since 1980 and the trade-offs that manufacturers and consumers face when choosing between fuel economy, weight and engine power characteristics. The results suggest that if weight, horsepower and torque were held at their 1980 levels, fuel economy for both passenger cars and light trucks could have increased by nearly 50 percent from 1980 to 2006; this is in stark contrast to the 15 percent by which fuel economy actually increased. I also find that once technological progress is considered, meeting the CAFE standards adopted in 2007 will require halting the observed increases in weight and engine power characteristics, but little more; in contrast, the standards recently announced by the new...

The Implied Cost of Carbon Dioxide under the Cash for Clunkers Program

Fri, 14 Aug 2009 00:00:00 +0000

The Cash for Clunker program aims to stimulate the economy, provide relief for automobile manufacturers and reduce greenhouse gas emissions. In this research note, I present estimates of the implied cost of carbon dioxide reductions under the Cash for Clunker program. The estimates suggest that the program is an expensive way to reduce greenhouse gases. This is true under a wide range of assumptions regarding the increase in fuel economy of new vehicles purchased under the program, how long the clunkers would have been on the road if not for the program, and whether we account for reductions in criteria pollutants. Conservative estimates of the implied carbon cost exceed $365 per ton; best case scenario parameter values suggest a cost of carbon of $237 per ton.

Building Out Alternative Fuel Retail Infrastructure: Government Fleet Spillovers in E85

Fri, 14 Aug 2009 00:00:00 +0000

One significant obstacle to meeting aggressive federal and state alternative fuel consumption targets is the relative scarcity of retail fueling stations that carry alternative fuels. Policies that encourage or mandate use of alternative fuel vehicles in government fleets, thereby increasing demand for such fuels, are one popular approach to stimulating further development of the alternative fuel retail infrastructure. I focus specifically on flex-fuel vehicles (FFVs) that burn E85, a combination of 85% ethanol and 15% gasoline, to study the impact of government fleet composition on retail alternative fuel infrastructure. Using data from six states in the Midwest that account for over 60% of US E85 stations, I show that government fleet adoption of FFVs leads to an increase in retail E85 stations. This finding persists when using instrumental variables techniques to address the endogeneity of government fleet FFV purchases. I also explore whether fuel station retail market...

What Do Emissions Markets Deliver and to Whom? Evidence from Southern California’s NOx Trading Program

Tue, 7 Jul 2009 00:00:00 +0000

A perceived advantage of cap-and-trade programs over more prescriptive environmental regulation is that enhanced compliance flexibility and cost effectiveness can make more stringent emissions reductions politically feasible. However, increased compliance flexibility can also result in an inequitable distribution of pollution. We investigate these issues in the context of Southern California’s RECLAIM program. We match facilities in RECLAIM with similar California facilities also located in non-attainment areas. Our results indicate that emissions fell approximately 24 percent, on average, at RECLAIM facilities relative to our counterfactual. Furthermore, we find that observed changes in emissions do not vary significantly with neighborhood demographic characteristics.

Clearing the Air? The Effects of Gasoline Content Regulation on Air Quality

Wed, 15 Apr 2009 00:00:00 +0000

This paper examines the effects of U.S. gasoline content regulations on groundlevel ozone pollution. These regulations are costly and have been shown to fragment gasoline markets and raise prices paid by consumers. We provide the first comprehensive empirical estimates of the regulations’ air quality benefits. We exploit the fact that gasoline regulations vary by time and place of introduction, using both difference-in-difference and regression discontinuity designs. We show that federal regulations targeting the emissions of volatile organic compounds (VOCs), one of the two main precursors to ozone, do not substantially improve air quality. This outcome is driven by the response of refiners to the regulation: minimizing the cost of abatement involves removing a type of VOC from gasoline that is not an important determinant of ozone pollution. In California, however, we show that precisely targeted regulations requiring the removal of VOCs particularly prone to forming ozone...

Program Evaluation and Incentives for Administrators of Energy-Efficiency Programs: Can Evaluation Solve the Principal/Agent Problem?

Fri, 3 Apr 2009 00:00:00 +0000

This paper addresses the nexus between the evaluation of energy-efficiency programs and incentive payments based on performance for program administrators in California. The paper describes problems that arise when evaluators are asked to measure program performance by answering the counterfactual question, what would have happened in the absence of the program? Then the paper examines some ways of addressing these problems. Key conclusions are 1) program evaluation cannot precisely and accurately determine the counterfactual, there will always be substantial uncertainty, 2) given the current state of knowledge, the decision to tie all of the incentive to program outcomes is misguided, and 3) incentive programs should be regularly reviewed and revised so that they can be adapted to new conditions.

Regulation, Allocation, and Leakage in Cap-and-Trade Markets for CO2

Fri, 3 Apr 2009 00:00:00 +0000

Among the most contentious elements of the design of cap-and-trade systems for emissions trading is the allocation or assignment of the emissions credits themselves. Policy-makers usually try to satisfy a range of goals through the allocation process, including easing the transition costs for high-emissions firms, reducing leakage to unregulated regions, and mitigating the impact of the regulations on product prices such as electricity. In this paper we develop a detailed representation of the US western electricity market to assess the potential impacts of various allocation proposals. Several proposals involve the “contingent” allocation of permits, where the allocation is tied to the output, or input use, of plants. These allocation proposals are designed with the goals of limiting the pass-through of carbon costs to product prices, mitigating leakage, and of mitigating the costs to high-emissions firms. However, contingent allocation can greatly inflate permit prices, thereby...

The Implications of a Gasoline Price Floor for the California Budget and Greenhouse Gas Emissions

Wed, 14 Jan 2009 00:00:00 +0000

California is faced with an unprecedented budget crisis. The state is also committed to significant reductions in greenhouse gases that cause climate change. Meanwhile, the price of gasoline is plunging as the world economic slowdown cuts oil demand. At the intersection of these three situations lies an opportunity. In this policy paper, I analyze the effects of a transportation fuel surcharge that moves inversely to the price of oil. Such a surcharge could stabilize gasoline prices at levels that a few months ago would have been celebrated by consumers and still significantly reduce California’s budget deficit. It would also slow the return of gas-guzzling vehicles that will otherwise result if oil prices remain at current levels.

Does Daylight Saving Time Save Energy? Evidence from a Natural Experiment in Indiana

Mon, 24 Nov 2008 00:00:00 +0000

The history of Daylight Saving Time (DST) has been long and controversial. Throughout its implementation during World Wars I and II, the oil embargo of the 1970s, consistent practice today, and recent extensions, the primary rationale for DST has always been to promote energy conservation. Nevertheless, there is surprisingly little evidence that DST actually saves energy. This paper takes advantage of a natural experiment in the state of Indiana to provide the first empirical estimates of DST effects on electricity consumption in the United States since the mid-1970s. Focusing on residential electricity demand, we conduct the first-ever study that uses micro-data on households to estimate an overall DST effect. The dataset consists of more than 7 million observations on monthly billing data for the vast majority of households in southern Indiana for three years. Our main finding is that—contrary to the policy’s intent—DST increases residential electricity demand. Estimates...

Sacred Cars? Optimal Regulation of Stationary and Non-stationary Pollution Sources

Mon, 24 Nov 2008 00:00:00 +0000

For political and practical reasons, environmental regulations sometimes treat point source polluters, such as power plants, differently from mobile source polluters, such as vehicles. This paper measures the extent of this regulatory asymmetry in the case of nitrogen oxides (NOx), the criteria air pollutant that has proven to be the most recalcitrant in the United States. We find significant differences in marginal abatement costs across source types with the marginal cost of reducing NOx from cars less than half of the marginal cost of reducing NOx from power plants. Our findings have important implications for the efficiency of NOx emissions reductions and, more broadly, the benefits from increasing the sectoral scope of environmental regulation. We estimate that the costs of achieving the desired emissions reductions could have been reduced by nearly $2 billion, or 9 percent of program costs, had marginal abatement costs been equated across source types.

Equity Effects of Increasing-Block Electricity Pricing

Mon, 24 Nov 2008 00:00:00 +0000

Utility regulators frequently attempt to use tariff structures to pursue both distributional and efficiency goals. Efficiency necessitates setting prices as close to marginal costs as possible while still allowing the firm to cover its costs. The common distributional goal is to protect low-income customers from high prices. Perhaps nowhere is the conflict between these goals greater than in the use of increasing-block residential utility pricing, in which the marginal price to the customer increases as the customer’s usage rises. Since the 2000-01 California electricity crisis, the state has adopted some of the most steeply increasing-block tariffs in electric utility history, but the distributional and efficiency effects have not been analyzed in detail. Using a novel approach for matching customer bill data with census data on area income distributions, I derive estimates of the income redistribution effected by the increasing-block tariffs used by California regulated electric...

When to Pollute, When to Abate? Intertemporal Permit Use in the Los Angeles NOx Market

Mon, 20 Oct 2008 00:00:00 +0000

Intertemporal tradability allows an emissions market to reduce abatement costs. We study intertemporal trading of nitrogen oxides permits in the RECLAIM program in Southern California. A theoretical model captures the program’s key intertemporal features: two overlapping permit cycles, two compliance cycles for facilities, and tradable permits. We characterize the competitive equilibrium; show that it is cost effective; and demonstrate the firms’ incentive to delay abatement, i.e., to trade intertemporally. Using model extensions to explore market design issues, an arbitrage condition implies that the equilibrium is invariant to overlapping compliance cycles, but depends crucially on overlapping permit cycles. We empirically investigate intertemporal trading of permits using panel data on RECLAIM facilities for 1994-2006. Facilities undertake trading by using a considerable proportion of permits of the opposite cycle. We econometrically test two theoretical propositions – delayed...

Cost, Conflict and Climate: U.S. Challenges in the World Oil Market

Thu, 24 Jan 2008 00:00:00 +0000

Dramatic increases in the price of crude oil during the last half of 2007 have ratcheted up attention on energy policy, but cost is only one of the three oil challenges that confront the U.S. This short essay discusses the recent increases in oil prices and attempts to clarify how the challenge from high oil costs interacts with, but is distinct from, the geopolitical and climate change challenges that oil use also creates. Central to addressing these challenges successfully is recognizing that policy responses need to be evaluated in the context of the worldwide oil market.

The Market Value and Cost of Solar Photovoltaic Electricity Production

Thu, 24 Jan 2008 00:00:00 +0000

The high cost of power from solar photovoltaic (PV) panels has been a major deterrent to the technology’s market penetration. Proponents have argued, however, that typical analyses overlook many of the benefits of solar PV. Some of those benefits are in the realm of environmental and security externalities, but others occur within the electricity markets. In this paper, I attempt to do a more complete market valuation of solar PV. I incorporate the fact that power from solar PV panels is generated disproportionately at times when electricity is most valuable due to high demand and increased line losses. I find that the degree to which the timing of solar PV production enhances its value depends very much on the extent to which wholesale prices peak with demand, which in turn depends on the proportion of reserve capacity held in the system. In a typical US system with substantial excess capacity, I find that the favorable timing of solar PV production increases its value by...

Electricity Rate Structures and the Economics of Solar PV: Could Mandatory Time-of-Use Rates Undermine California’s Solar Photovoltaic Subsidies?

Wed, 9 Jan 2008 00:00:00 +0000

In May 2007, a Los Angeles Times newspaper article reported that the California Solar Initiative (CSI), commonly called the "million solar roofs" program, was being hobbled by a requirement that recipients of the solar PV subsidies go on time-of-use (TOU) rates. TOU rates charge higher prices for electricity at peak demand times (primarily weekday summer afternoons in California) and lower prices at off-peak times than the more common flat-rate tariff, which imposes the same price for a kilowatt-hour (kWh) of electricity at all times. The LA Times story reported that orders for solar installations had dropped 78% since January 1, 2007 when the TOU-mandate went into effect for solar-rebate recipients. By June, California regulators had eliminated the TOU mandate. I examine data from a sample of 274 medium- to high-use residential customers of Pacific Gas & Electric (PG&E) and Southern California Edison (SCE) to see if the TOU mandate makes the solar rebate program...

Principal-agent incentives, excess caution, and market inefficiency: Evidence from utility regulation

Wed, 9 Jan 2008 00:00:00 +0000

Regulators and firms often use incentive schemes to attract skillful agents and to induce them to put forth effort in pursuit of the principals’ goals. Incentive schemes that reward skill and effort, however, may also punish agents for adverse outcomes beyond their control. As a result, such schemes may induce inefficient behavior, as agents try to avoid actions that might make it easier to directly associate a bad outcome with their decisions. In this paper, we study how such caution on the part of individual agents may lead to inefficient market outcomes, focusing on the context of natural gas procurement by regulated public utilities. We posit that a regulated natural gas distribution company may, due to regulatory incentives, engage in excessively cautious behavior by foregoing surplus-increasing gas trades that could be seen ex post as having caused supply curtailments to its customers. We derive testable implications of such behavior and show that the theory is supported...

Learning by Drilling: Inter-Firm Learning and Relationship Persistence in the Texas Oilpatch

Wed, 9 Jan 2008 00:00:00 +0000

Production in many industries, such as construction and heavy manufacturing, relies on inputs from both lead firms and contractors. These firms’ joint productivity often hinges on their ability to share information and coordinate activities, suggesting that they have strong incentives to learn about each other’s personnel, procedures, and expertise. This learning differs from standard learning-by-doing in that it is relationship-specific: its benefits are not appropriable outside the relationship in which the learning takes place. In this paper, I empirically examine the importance of relationship-specific learning using high-frequency data from oil and gas drilling. I find that the joint productivity of a lead firm and its drilling contractor is enhanced significantly as they accumulate experience working together. This result is robust to other relationship specificities. I also find that firms appear to recognize the benefits of joint experience: controlling for other specificities,...

The Implementation of California AB 32 and its Impact on Wholesale Electricity Markets

Wed, 9 Jan 2008 00:00:00 +0000

California is considering the adoption of a cap-and-trade regulatory mechanism for regulating the greenhouse gas emissions from electricity and perhaps other industries. Two options have been widely discussed for implementing cap-and-trade in the electricity industry. The first is to regulate the emissions from electricity at the load-serving entity (LSE) level. The second option for implementation of cap-and-trade has been called the “first-seller” approach. Conceptually, under first-seller, individual sources (i.e. power plants) within California would be responsible for their emissions, as with traditional cap-and-trade systems. Emissions from imports would be assigned to the “importing firm.” An option that has not been as widely discussed is to implement a pure source-based system within California, effectively excluding imports from the cap-and-trade system altogether. This paper examines these three approaches to implementing cap-and-trade for California’s electricity...

Climate Change, Mortality, and Adaptation: Evidence from Annual Fluctuations in Weather in the US

Wed, 9 Jan 2008 00:00:00 +0000

This paper produces the first large-scale estimates of the US health related welfare costs due to climate change. Using the presumably random year-to-year variation in temperature and two state of the art climate models, the analysis suggests that under a ‘business as usual’ scenario climate change will lead to an increase in the overall US annual mortality rate ranging from 0.5% to 1.7% by the end of the 21st century. These overall estimates are statistically indistinguishable from zero, although there is evidence of statistically significant increases in mortality rates for some subpopulations, particularly infants. As the canonical Becker-Grossman health production function model highlights, the full welfare impact will be reflected in health outcomes and increased consumption of goods that preserve individuals’ health. Individuals’ likely first compensatory response is increased use of air conditioning; the analysis indicates that climate change would increase US annual...

Incomplete Environmental Regulation, Imperfect Competition, and Emissions Leakage

Wed, 9 Jan 2008 00:00:00 +0000

For political, jurisdictional and technical reasons, environmental regulation of industrial pollution is often incomplete: regulations apply to only a subset of facilities contributing to a pollution problem. Policymakers are increasingly concerned about the emissions leakage that may occur if unregulated production can be easily substituted for production at regulated firms. This paper analyzes emissions leakage in an incompletely regulated and imperfectly competitive industry. When regulated producers are less polluting than their unregulated counterparts, emissions under incomplete regulation exceed the level of emissions that would have occurred under complete regulation. The reverse can be true when regulated firms are relatively dirty. In a straightforward application of the theory of the second best, I show that incomplete regulation can welfare dominate complete regulation of emissions from an asymmetric oligopoly. The model is used to simulate greenhouse gas emissions...

Towards a Sustainable Energy Balance: Progressive Efficiency and the Return of Energy Conservation

Wed, 9 Jan 2008 00:00:00 +0000

We argue that today’s primary focus on energy efficiency may not be sufficient to slow (and ultimately reverse) the growth in total energy consumption and carbon emissions. Instead, policy makers need to return to an earlier emphasis on “conservation,” with energy efficiency seen as a means rather than an end in itself. We briefly review the concept of “intensive” versus “extensive” variables (i.e., energy efficiency versus energy consumption), and why attention to both consumption and efficiency is essential for effective policy in a carbon- and oil-constrained world with increasingly brittle energy markets. To start, energy indicators and policy evaluation metrics need to reflect energy consumption as well as efficiency.

We introduce the concept of “progressive efficiency,” with the expected or required level of efficiency varying as a function of house size, appliance capacity, or more generally, the scale of energy services. We propose introducing progressive efficiency...

Greenhouse Gas Reductions Under Low Carbon Fuel Standards?

Tue, 17 Jul 2007 00:00:00 +0000

A low carbon fuel standard (LCFS) seeks to reduce greenhouse gas emissions by capping an industry’s carbon emissions per unit of output. California has launched an LCFS for automotive fuels; others have called for a national LCFS. We show that this policy causes production of high-carbon fuels to decrease but production of low-carbon fuels to increase. The net effect of this may be an increase in carbon emissions. The LCFS may also reduce welfare, and the best LCFS may be no LCFS. We simulate the outcomes of a national LCFS, focusing on gasoline and ethanol as the high- and low-carbon fuels. For a broad range of parameters, we find that the LCFS is unlikely to increase CO2 emissions. However, the surplus losses from the LCFS are quite large ($80 to $760 billion annually for a national LCFS reducing carbon intensities by 10 percent), and the average carbon cost ($307 to $2,272 per ton of CO2 for the same LCFS) can be much larger than damage estimates. We propose an efficient...

California's Greenhouse Gas Policies: Local Solutions to a Global Problem?

Tue, 17 Jul 2007 00:00:00 +0000

emissions. This paper summarizes the initiatives likely to impact the electricity generating sector. We present calculations showing that there is a substantial risk that two of the most prominent policies could simply result in a reshuffling, on paper, of the electricity generating resources within the West that are dedicated to serving California. This reshuffling is different from the conventional leakage problem as it involves no physical changes to the way electricity is generated across regulated and unregulated regions, but is instead driven by a contractual reshuffling of who buys power from whom. The problem is similar to an ineffective consumer boycott. The problem is still present but less severe if more Western states adopt carbon limitations. We also show that some of the least market-based initiatives, the renewable portfolio standards (RPS), are likely to have the biggest near-term impact on the carbon-intensity of electricity generation in the West. Thus the...

Demand-Side Management and Energy Efficiency Revisited

Tue, 17 Jul 2007 00:00:00 +0000

The key finding of an influential paper that received the International Association for Energy Economists' Best Paper Award (2004) is that utilities have been overstating electricity savings and underestimating costs associated with energy efficiency demand side management (DSM) programs. This claim is based on point estimates of average DSM-related savings and costs implied by an econometric model of residential electricity demand. In this response we first argue that the choice of test statistics, by not weighting estimated savings and costs by utility electricity sales and DSM expenditures respectively, biases results in favor of rejecting the null hypothesis that utility-reported electricity savings reflect true values. We also note that utility estimates of average program savings and costs are rejected based on point estimates alone; no attempt is made to evaluate the uncertainty surrounding these estimates. We use the same data and econometric model to estimate the appropriate...

The Guy at the Controls: Labor Quality and Power Plant Efficiency

Tue, 17 Jul 2007 00:00:00 +0000

This paper examines the impact of individual human operators on the fuel efficiency of power plants. Although electricity generation is a fuel and capital intensive enterprise, anecdotal evidence, interviews, and empirical analysis support the hypothesis that labor, particularly power plant operators, can have a non-trivial impact on the operating efficiency of the plant. We present evidence to demonstrate these effects and survey the policies and practices of electricity producing firms that either reduce or exacerbate fuel efficiency differences across individual plant operators.

Virtual Divestitures, Will They Make A Difference?: Cournot Competition, Options Markets and Efficiency

Wed, 14 Feb 2007 00:00:00 +0000

Antitrust authorities in Europe and the U.S. oblige dominant generators to virtually divest generation capacity as a way to mitigate market power. This paper analyzes the implementation of such a divestiture of Virtual Power Plants (VPPs), and distinguishes two types: financial VPPs, which are pure insurance contracts on the price for electricity, and physical VPPs, which are contracts for physical delivery of electricity. Our findings show that in a monopoly framework both contracts have the same outcomes whilst in an oligopoly setting both contracts have different effects on the strategic behavior of the players, affecting their competitiveness.

Wealth Transfers Among Large Customers from Implementing Real-Time Retail Electricity Pricing

Wed, 14 Feb 2007 00:00:00 +0000

Adoption of real-time electricity pricing — retail prices that vary hourly to reflect changing wholesale prices — removes existing cross-subsidies to those customers that consume disproportionately more when wholesale prices are highest. If their losses are substantial, these customers are likely to oppose RTP initiatives unless there is a supplemental program to offset their loss. Using data on a sample of 1142 large industrial and commercial customers in northern California, I show that RTP adoption would result in significant transfers compared to a flat-rate tariff. When compared to the time-of-use rates (simple peak/offpeak tariffs) that these customers already face, however, the transfers drop by 29%; even under the more extreme price volatility scenario that I examine, 90% of customers would see changes of between a 4% bill reduction and an 8% bill increase. Though customer price responsiveness reduces the loss incurred by those with high-cost demand profiles, I also...

Evidence of a Shift in the Short-Run Price Elasticity of Gasoline Demand

Wed, 14 Feb 2007 00:00:00 +0000

Understanding the sensitivity of gasoline demand to changes in prices and income has important implications for policies related to climate change, optimal taxation and national security, to name only a few. While the short-run price and income elasticities of gasoline demand in the United States have been studied extensively, the vast majority of these studies focus on consumer behavior in the 1970s and 1980s. There are a number of reasons to believe that current demand elasticities differ from these previous periods, as transportation analysts have hypothesized that behavioral and structural factors over the past several decades have changed the responsiveness of U.S. consumers to changes in gasoline prices. In this paper, we compare the price and income elasticities of gasoline demand in two periods of similarly high prices from 1975 to 1980 and 2001 to 2006. The short-run price elasticities differ considerably and range from -0.034 to -0.077 during 2001 to 2006, versus...

Index Contracts and Spot Market Competition

Wed, 14 Feb 2007 00:00:00 +0000

It has long been argued that long-term contracts enhance competition, but the repeated nature of many markets has been neglected. This paper analyzes the impact of long-term contracts on the ability to sustain collusive outcomes. I consider a simple model where firms have signed index contracts and repeatedly interact on the spot market. The contracts specify a quantity and a price indexed to the spot price where the indexation can take different forms. It is shown that these contracts facilitate collusion on the spot market provided that the indexation to the spot price is sufficiently strong.

The Economic Effects of Vintage Differentiated Regulations: The Case of New Source Review

Wed, 14 Feb 2007 00:00:00 +0000

This paper analyzes the effects of the New Source Review (NSR) environmental regulations on coal-fired electric power plants. The New Source Review program, which grew out of the Clean Air Act of 1970, required new plants to install costly pollution control equipment but exempted existing plants with a grandfathering clause. Previous theoretical research has shown that vintage differentiated regulations, like NSR, can lead to distortions, and if the distortions are large, the short-run effect of a regulation like NSR may be to increase pollution rather than reduce it. Older, dirtier plants may be kept in service longer or run more intensively since replacing them becomes more expensive. In the case of NSR, there is also an effect associated with its enforcement. Since upgrading a plant could potentially qualify it as a new plant, the old plants may have done less maintenance leading to lower efficiency and higher emissions. This paper attempts to estimate the extent to which...

Averting Enforcement: Strategic Response to the Threat of Environmental Regulation

Wed, 14 Feb 2007 00:00:00 +0000

This paper uses data from the U.S. electric power industry to explore the strategic responses of regulated firms to government enforcement. We focus on the enforcement of New Source Review, a provision of the Clean Air Act that imposes stringent emissions limitations on substantially modified older power plants. Starting in late 1999, the EPA sued the owners of 46 power plants for NSR violations. This paper explores how electric utilities responded to both the perceived threat of future action, and the action itself. We find that the threat of action did have a significant effect on emissions: plants that were likely to be named in the lawsuits (as determined by our discrete choice model of the lawsuit decision) reduced their emissions by about 17 percent on the eve of the lawsuits. After the lawsuits, we find no significant difference between those plants sued and other relatively dirty coal-fired power plants.

An Equilibrium Model of Investment in Restructured Electricity Markets

Wed, 14 Feb 2007 00:00:00 +0000

In this paper, we describe a framework modeling for investment in restructured electricity markets. This framework is extremely flexible, and is designed to be able to capture many of the key considerations that distinguish investment in deregulated electricity markets from both investment in regulated markets, and investment in competitive markets for other commodities. The model is composed of two distinct elements: a detailed model of short-run, or ‘spot market’ competition in electricity markets, and a dynamic long-run equilibrium model of investment decisions of firms. The investment choices by firms will be driven by the underlying profits implied by the short-term markets under different investment paths. Firms will choose the investment paths that lead them to more profitable states of short-term markets.

We implement the framework for a representative electricity market and several qualitative insights can be demonstrated. First, the incentives of individual...

Restructuring, Ownership and Efficiency: The Case of Labor in Electricity Generation

Wed, 14 Feb 2007 00:00:00 +0000

This analysis considers improvements in productive efficiency that can result from a movement from a regulated framework to one that allows for market-based incentives for industry participants. Specifically, I look at the case of restructuring in the electricity generation industry. As numerous industries and economies have undergone this sort of transition to varying degrees, it is instructive to assess the performance of market-based incentives relative to what was observed under tighter regulation. Using data from the electricity industry, this analysis considers the total effect of restructuring on one input to the production process, labor, as reflected in employment levels, payroll per employee and aggregate establishment payroll. Using concurrent payroll and employment data from non-utility (“merchant”) and utility generators in both restructured and nonrestructured states, I estimate the effect of market liberalization, comprising both new entry and state-level legislation,...

Applying Psychology to Economic Policy Design: Using Incentive Preserving Rebates to Increase Acceptance of Critical Peak Electricity Pricing

Wed, 14 Feb 2007 00:00:00 +0000

This project extends the idea that policy makers should address problems by improving economic incentives. This project adds that presenting incentives in a way that reflects how people make decisions can sometimes improve consumers’ responses to the incentives and policy outcomes. This paper uses behavioral economics to propose ways to increase electricity policy effectiveness. The cost of generating power fluctuates enormously from hour to hour but most customers pay time-invariant prices for power. The mismatch between the fluctuating cost and the fixed price wastes billions of dollars. Critical Peak Pricing (CPP) reduces this waste by setting offpeak, peak, and “critical” prices that better reflect the cost of power during time periods. Customers in CPP pilot programs used less power during high-priced periods than did customers on traditional, time-invariant rates. CPP customers reported high satisfaction levels and often saved 10% or more. Yet, roughly 99% of customers...

The Length of Contracts and Collusion

Wed, 14 Feb 2007 00:00:00 +0000

Many commodities (including energy, agricultural products and metals) are sold both on spot markets and through long-term contracts which commit the parties to exchange the commodity in each of a number of spot market trading periods. This paper shows how the length of forward contracts affects the possibility of collusion in a repeated pricesetting game. We find that as the duration of contracts increases, collusion becomes harder to sustain. Nevertheless, firms with low discount factors that would not be able to sustain collusion without contracts, can always sustain some collusive prices above marginal cost, provided that they sell enough contracts. Hence long-term contracts have an ambiguous impact on collusion. Such ambiguity is due to the interaction of two effects, the gain-cutting effect, which reduces the immediate gain from defection, and the protection effect, which reduces the amount of punishment that deviators can receive.

Customer Risk from Real-Time Retail Electricity Pricing: Bill Volatility and Hedgability

Wed, 14 Feb 2007 00:00:00 +0000

One of the most critical concerns that customers have voiced in the debate over real-time retail electricity pricing is that they would be exposed to risk from fluctuations in their electricity cost. The concern seems to be that a customer could find itself consuming a large quantity of power on the day that prices skyrocket and thus receive a monthly bill far larger than it had budgeted for. I analyze the magnitude of this risk, using demand data from 1142 large industrial customers, and then ask how much of this risk can be eliminated through various straightforward financial instruments. I find that very simple hedging strategies can eliminate more than 80% of the bill volatility that would otherwise occur. Far from being complex, mystifying financial instruments that only a Wall Street analyst could love, these are simple forward power purchase contracts, and are already offered to retail customers by a number of fully-regulated utilities that operate real-time pricing...

Residential Customer Response to Real-time Pricing: The Anaheim Critical Peak Pricing Experiment

Wed, 14 Feb 2007 00:00:00 +0000

This paper analyzes the results of a critical peak pricing (CPP) experiment involving 123 residential customers of the City of Anaheim Public Utilities (APU) over the period June 1, 2005 to October 14, 2005. Using a nonparametric condition mean estimation framework that allows for customer-specific fixed effects and day-of-sample fixed effects, I find that customers in the treatment group consumed an average of 12 percent less electricity during the peak hours of the day on CPP days than customers in the control group. There is also evidence that this reduction in consumption for customers in the treatment group relative to customers in the control group is larger on higher temperature CPP days. The impact of CPP events is confined to the peak periods of CPP days. Mean electricity consumption by customers in the treatment group is not significantly different from that of customers in the control group during the peak or off-peak periods of the day before or day after a CPP...

Does Extending Daylight Saving Time Save Energy? Evidence from an Australian Experiment

Wed, 14 Feb 2007 00:00:00 +0000

Rising energy prices and environmental concerns are driving countries to consider extending Daylight Saving Time (DST) in order to conserve energy. Beginning in 2007, the U.S. will lengthen DST by one month with the specific goal of reducing electricity consumption by 1%. In this paper we question the findings of prior DST studies, which often rely on simulation models and extrapolation rather than empirical evidence. By contrast, our research exploits a quasi-experiment, in which parts of Australia extended DST by two months to facilitate the Sydney Olympic Games in 2000. Using detailed panel data on half-hourly electricity consumption, prices, and weather conditions, we show that the extension failed to reduce electricity demand. We further examine prior DST studies and find that the most sophisticated simulation model available in the literature significantly overstates electricity savings when it is applied to the Australian data. These results suggest that current plans...

The Economic Impacts of Climate Change: Evidence from Agricultural Profits and Random Fluctuations in Weather

Wed, 14 Feb 2007 00:00:00 +0000

This paper measures the economic impact of climate change on US agricultural land by estimating the effect of the presumably random year-to-year variation in temperature and precipitation on agricultural profits. Using long-run climate change predictions from the Hadley 2 Model, the preferred estimates indicate that climate change will lead to a $1.3 billion (2002$) or 4.0% increase in annual profits. The 95% confidence interval ranges from -$0.5 billion to $3.1 billion and the impact is robust to a wide variety of specification checks, so large negative or positive effects are unlikely. There is considerable heterogeneity in the effect across the country with California’s predicted impact equal to -$0.75 billion (or nearly 15% of state agricultural profits). Further, the analysis indicates that the predicted increases in temperature and precipitation will have virtually no effect on yields among the most important crops, which suggest that the small effect on profits are not...

Feasibility of Wholesale Electricity Competition in a Developing Country: Insights from Simulating a Market in Maharashtra State, India

Wed, 14 Feb 2007 00:00:00 +0000

Conventional wisdom suggests that competitive wholesale electricity markets are not feasible in most developing countries. However, systematic analyses of the feasibility of wholesale competition in a specific developing country are rare. I model a potential wholesale electricity market in Maharashtra (MH) state, India in a Cournot framework to analyze the circumstances under which it could be competitive. I model the effect of certain characteristics of the MH state electricity sector that create unique opportunities for demand response. I also analyze the effect of publicly owned generation firms on the competitiveness of the market. Further, I model the effect of policies such as the divestiture of large firms and the requirement of long-term contracts. I find that demand response and the presence of publicly owned generation firms substantially increase the competitiveness of a potential wholesale electricity market in MH state. Further, the market would be robustly competitive...

Emissions Trading, Electricity Industry Restructuring, and Investment in Pollution Abatement

Fri, 2 Dec 2005 00:00:00 +0000

Policy makers are increasingly relying on emissions trading programs to address environmental problems caused by air pollution. If polluting firms in an emissions trading program face different economic regulations and investment incentives in their respective industries, emissions markets may fail to minimize the total cost of achieving pollution reductions. This paper analyzes an emissions trading program that was introduced to reduce smog-causing pollution from large stationary sources (primarily electricity generators) in 19 eastern states. I develop and estimate a random-coefficients discrete choice model of a plant's environmental compliance decision. Using variation in state-level electricity industry restructuring activity, I identify the effect of economic regulation on pollution permit market outcomes. There are two important findings. First, plants in states that have restructured electricity markets are less likely to adopt more capital intensive compliance options....

Electricity Resource Adequacy: Matching Policies and Goals

Tue, 30 Aug 2005 00:00:00 +0000

Policies designed to ensure resource adequacy in electricity markets have been rooted in a disparate set of policy goals. Differences over the appropriate goals and focus of such policies have produced different views about what are the appropriate means for achieving these goals. This paper explores the motivations for resource adequacy policies and discusses how different RA policies address, or conflict, with these goals.

Oligopoly Equilibria in Electricity Contract Markets

Tue, 30 Aug 2005 00:00:00 +0000

The competitive implications of the ability of firms to trade in transparent forward markets has received considerable attention in the academic literature. These implications have not had much impact on policy however. In this paper I examine the implications of forward contracts on oligopoly environments by extending the model of Allaz and Vila to an environment with multiple firms and increasing marginal cost. I then take estimates of key parameters of this model from existing electricity markets to predict the market impact of one round of public contracting, such as those seen in auctions for retail provision and resource procurement. The results imply that the importance of supplier concentration is magnified when forward contracts are present.

Wealth Transfers from Implementing Real-Time Retail Electricity Pricing

Tue, 30 Aug 2005 00:00:00 +0000

Adoption of real-time electricity pricing -- retail prices that vary hourly to reflect changing wholesale prices -- removes existing cross-subsidies to those customers that consume disproportionately more when wholesale prices are highest. If their losses are substantial, these customers are likely to oppose RTP initiatives unless there is a supplemental program to offset their loss. Using data on a random sample of 636 industrial and commercial customers in southern California, I show that RTP adoption would result in significant transfers compared to a flat-rate tariff. When compared to the time-of-use rates (simple peak/offpeak tariffs) that these customers already face, however, the transfers drop by nearly half; even under the more extreme price volatility scenario that I examine, 90% of customers would see changes of between a 9% bill reduction and a 14% bill increase. Though customer price responsiveness reduces the loss incurred by those with high-cost demand profiles,...

Ramsey Pricing in a Congested Network with Market Power in Generation: A Numerical Illustration for Belgium

Thu, 14 Jul 2005 00:00:00 +0000

This paper derives the socially optimal transmission prices in a congested electricity network when there is imperfect competition in generation, and when the budget constraint of the network operator is binding. The results which we derive are a generalization of the standard Ramsey prices and also of the locational marginal prices (LMP). The model is illustrated with a numerical model based on the Belgian electricity data.

Retail Policies and Competition in the Gasoline Industry

Fri, 10 Jun 2005 00:00:00 +0000

We explore issues relating to the vertical structure of ownership and control in gasoline distribution and retailing. Some have argued that refiner control of the retail sector has increased California gasoline prices, prompting proposals for legislation to restrict refiner participation in gasoline retailing. We study the arguments for and against government intervention in gasoline distribution and retailing, and describe the conditions under which such intervention could be justified. In theory, vertical controls in the gasoline industry can produce both positive and negative effects. Many vertical controls can increase efficiency, both operations and in the transactions between refiners and retail outlet. Some controls, however, could also influence the structure or incentives of refiners in a way that increases their market power (reduces competition) and could therefore prove costly to consumers. In general, the positive aspects of vertical controls impact the pricing...

The Distributional and Environmental Effects of Time-Varying Prices in Competitive Electricity Markets

Fri, 10 Jun 2005 00:00:00 +0000

This paper analyzes the short-run effects of time-varying retail electricity prices on wholesale prices, consumer surplus, generator profits, efficiency, and emissions. We apply a model of real-time pricing (RTP) adoption in competitive markets to the Pennsylvania, New Jersey and Maryland (PJM) electricity market.

Consistent with theory, our simulations show that RTP adoption improves efficiency, reduces the variance and average of wholesale prices, and reduces all retail rates. In addition, we find that RTP adoption would increase the average load since increases in off-peak loads are large relative to the reductions in peak loads. Operating profits for all fossil-fired generation decrease with the largest decreases for oil-fired generation (59% when all customers adopt) and for gas-fired generation (34%). When all customers adopt RTP, the consumer surplus gain is approximately 2.5% of the energy bill, but the welfare gain is only 0.24% of the energy bill. The modest...

Ownership Change, Incentives and Plant Efficiency: The Divestiture of U.S. Electric Generation Plants

Tue, 26 Apr 2005 00:00:00 +0000

Electric industry restructuring in the US has led to rapid and substantial changes in the ownership of the existing stock of electricity generating plants. Between 1998 and 2001, over 300 electric generating plants in the US, accounting for nearly twenty percent of the total generating capacity, changed hands. Moreover, because the new owners are unregulated, they face different incentives from the utilities that were operating plants under cost-of-service regulation and had weak incentives to control operating costs. We use data from several sources, most importantly information on fuel efficiency from the Environmental Protection Agency’s Continuous Emissions Monitoring System (CEMS), to investigate changes in operating efficiency at plants that have been divested from utility to non-utility ownership. We examine efficiency changes relative to a set of plants that were retained under utility ownership. Our results suggest that fuel efficiency improved by about 2% following...

Do Households Smooth Small Consumption Shocks? Evidence from Anticipated and Unanticipated Variation in Home Energy Costs

Tue, 26 Apr 2005 00:00:00 +0000

Home energy costs comprise a significant fraction of household budgets, particularly for poor families. This paper analyzes how household consumption responds to changes in home energy outlays over the course of the year. We specify Euler equations describing nondurable and food consumption and then rely on changes in energy prices and weather severity to identify exogenous changes in disposable income. We distinguish changes in energy spending that are anticipated, for instance because it is winter in the Northeast, from those that are unanticipated, for instance because it is an unusually cold winter. We find little evidence of excess sensitivity to anticipated variation among households in the Consumer Expenditure Survey 1990-2002, even among those without substantial financial assets. However, the latter group experiences large consumption reactions to unanticipated changes.

Valuing the Time-Varying Electricity Production of Solar Photovoltaic Cells

Tue, 26 Apr 2005 00:00:00 +0000

Solar PV panels generate electricity only during daylight hours and generate more electricity when the sun is shining more intensely. As a result, in summer-peaking electricity systems, such as California and most of the U.S., power from PVs is produced disproportionately at times when the value of electricity is high. Thus, a valuation of solar PV electricity production that uses only the average wholesale cost of electricity will tend to undervalue the power. Yet, that is what happens by default in many installations because solar PVs are generally located at the end-user's premises and those end-users are often billed on a flat per kilowatt-hour rate that does not reflect time-varying valuation. As a result, the benefits to many owners of solar PV in reduced electricity bills do not reflect the true time-varying valuation of the power the panels produce. I use solar PV production information in conjunction with wholesale price data and simulations to estimate the actual...

Is Real-Time Pricing Green?: The Environmental Impacts of Electricity Demand Variance

Tue, 29 Mar 2005 00:00:00 +0000

Economists have long advocated for electricity pricing that accurately reflects time-varying production costs. In particular, real-time pricing (RTP) would improve the efficiency of electricity consumption and investment and would lessen the potential harm from market power. Conventional wisdom has claimed that RTP has an additional benefit, namely, reduced emissions from reduced peak demand. We argue that RTP will reduce variance of electricity load and estimate the short-run impacts of a reduction in variance on emissions of SO 2, NOx, and CO2. According to our estimates, a reduction in within-day load variance would decrease emissions of some pollutants in some NERC regions (FRCC in Florida, MAAC in the Mid-Atlantic, and MAIN in the Illinois area). However, a reduction in within-day variance would actually increase emissions of all three pollutants in the Eastern Mid-West (ECAR) and the Southeast (SERC) and of two of three pollutants in Texas (ERCOT), the Great Plains (MAPP),...

Inefficiencies and Market Power in Financial Arbitrage: A Study of California's Electricity Markets

Tue, 29 Mar 2005 00:00:00 +0000

In the three years following the restructuring of the California electricity industry, 1998 to 2000, power trading occurred in both a day-ahead market and a real-time market. Despite the fact that the power traded in these two major markets was for delivery at the same times and locations, prices differed significantly in many months. We consider several explanations for persistent price differences between the markets. We conclude that uncertainty about regulatory penalties for trading in the real-time market caused most firms to eschew arbitrage between the two markets. The few firms that did carry out this (risky) arbitrage did not find it profit-maximizing to eliminate the price differences. Due to California’s electricity restructuring plan, the investor-owned utilities, which were the primary buyers of electricity, had little incentive to respond to the price differences. In the summer of 2000, however, when prices in both markets skyrocketed, we argue that the utilities’...

Has Restructuring Improved Operating Efficiency at U.S. Electricity Generating Plants?

Tue, 29 Mar 2005 00:00:00 +0000

This paper assesses the impact of electricity industry restructuring on generating plant operating efficiency. Cost-plus regulation flows costs through to ratepayers, providing utilities with few incentives to reduce operating costs. Restructuring programs increase utilities’ exposure to competitive markets, altering these incentives. We test the impact of these changes by estimating input demand equations using annual generating plant-level data. We compare changes in non-fuel operating expenses, the number of employees and fuel use across three groups of plants: municipally owned plants, whose owners were for the most part unaffected by restructuring, investor-owned utility plants in states that have not pursued restructuring, and investor-owned utility plants in states that had restructured their wholesale electricity markets prior to the California electricity crisis of 2000-2001. Our results suggest that municipally-owned plants experienced the smallest efficiency gains...

Market Power in California's Gasoline Market

Tue, 29 Mar 2005 00:00:00 +0000

In recent months, prices for California's special (CaRFG) gasoline have again exceeded U.S. average prices by much more than the difference in production costs. A number of observers have attributed the widening average differential to increasing scarcity of refinery capacity among plants that are equipped to manufacture CaRFG gasoline. While these arguments have generally been sound, the dismissals of market power concerns have not been well supported. We study the potential for firms in the CaRFG wholesale gasoline industry to exercise market power, examining the refining, importation and storage of the fuel. We don't dispute arguments that the elevated prices are consistent with competitive markets, but we illustrate that the data are also consistent with some firms exercising market power. We then discuss methods for, and difficulties in, distinguishing between competitive pricing and market power.

Market Effects of Environmental Regulation: Coal, Railroads and the 1990 Clean Air Act

Tue, 29 Mar 2005 00:00:00 +0000

Title IV of the 1990 Clean Air Act Amendments introduced a cap-and-trade system for sulfur dioxide emissions from electric power plants in the United States. This paper analyzes the effects of that regulatory change on the prices charged by the two railroads that hauled low-sulfur coal east from Wyoming.

We estimate the effect of the tradeable permits regime by comparing prices at affected plants (called “Table A plants”) before and after the allowance market took effect, and by comparing prices at those plants to prices at unaffected plants. We show that after Title IV took effect, the delivered price of low-sulfur coal — controlling for the minemouth price of coal and the variable cost of transportation — rose at Table A plants within approximately 1000 miles of the Powder River Basin, and fell at Table A plants located further away. This shift in the delivered price schedule of PRB coal is consistent with a theoretical model of the effects of emissions regulation on...

Biases in Static Oligopoly Models?: Evidence from the California Electricity Market

Tue, 29 Mar 2005 00:00:00 +0000

Estimating market power is often complicated by the lack of reliable measures of marginal cost. Instead, policy-makers often rely on other summary statistics of the market, thought to be correlated with price cost margins--such as concentration ratios or the HHI. In many industries, these summary statistics may be only weakly correlated with deviations from perfectly competitive pricing. Beginning with Gollop and Roberts (1979), a number of empirical studies have allowed the data to identify industry competition and marginal cost levels by estimating the firms' first order condition within a conjectural variations framework. Despite the prevalence of such "New Empirical Industrial Organization" (NEIO) studies, Corts (1999) illustrates the estimated mark-up levels may be biased, since the estimated conjectural variations model forces the supply relationship to be a ray through the marginal cost intercept, whereas this need not be true in dynamic games. In this paper, we use...

Cournot Competition, Financial Option Markets, and Efficiency

Tue, 29 Mar 2005 00:00:00 +0000

Allaz and Vila (1993) show that the existence of futures markets increases the efficiency of markets in a Cournot setting. This paper looks at the efficiency effect of financial options in a similar framework. It shows that the existence of financial options also makes markets more efficient; though to a smaller extent than futures. This is particularly relevant for markets with market power and costly storage, like electricity markets.

Reliability and Competitive Electricity Markets

Tue, 29 Mar 2005 00:00:00 +0000

Despite all of the talk about “deregulation” of the electricity sector, a large number of non-market mechanisms have been imposed on emerging competitive wholesale and retail markets. These mechanisms include spot market price caps, operating reserve requirements, non-price rationing protocols, and administrative protocols for managing system emergencies. Many of these mechanisms have been carried over from the old regime of regulated monopoly and continue to be justified as necessary responses to market imperfections of various kinds and engineering requirements dictated by the special physical attributes of electric power networks. This paper seeks to bridge the gap between economists focused on designing competitive market mechanisms and engineers focused on the physical attributes and engineering requirements they perceive as being needed for operating a reliable electric power system. The paper starts by deriving the optimal prices and investment program when there are...

The Long-Run Efficiency of Real-Time Electricity Pricing

Tue, 29 Mar 2005 00:00:00 +0000

Retail real-time pricing (RTP) of electricity -- retail pricing that changes hourly to reflect the changing supply/demand balance -- is very appealing to economists because it "sends the right price signals." Economic efficiency gains from RTP, however, are often confused with the short-term wealth transfers from producers to consumers that RTP can create. Abstracting from transfers, I focus on the long-run efficiency gains from adopting RTP in a competitive electricity market. Using simple simulations with realistic parameters, I demonstrate that the magnitude of efficiency gains from RTP is likely to be significant even if demand shows very little elasticity. I also show that "time-of-use" pricing, a simple peak and off-peak pricing system, is likely to capture a very small share of the efficiency gains that RTP offers.

Retail Electricity Competition

Tue, 29 Mar 2005 00:00:00 +0000

We analyze a number of unstudied aspects of retail electricity competition. We first explore the implications of load profiling of consumers whose traditional meters do not allow for measurement of their real time consumption, when consumers are homogeneous up to a scaling factor. In general, the combination of retail competition and load profiling does not yield the second best prices given the non price responsiveness of consumers. Specifically, the competitive equilibrium does not support the Ramsey two-part tariff. By contrast, when consumers have real time meters and are billed based on real time prices and consumption, retail competition yields the Ramsey prices even when consumers can only partially respond to variations in real time prices. More complex consumer heterogeneity does not lead to adverse se1ection and competitive screening behavior unless consumers have real time meters and are not rational. We then examine the incentives competitive retailers have to install...

Lessons from International Experience with Electricity Market Monitoring

Tue, 29 Mar 2005 00:00:00 +0000

This paper first describes those features of the electricity supply industry that make a prospective market monitoring process essential to a well-functioning wholesale market. Some of these features are shared with the securities industry, although the technology of electricity production and delivery make a reliable transmission network a necessary condition for an efficient wholesale market. These features of the electricity supply industry also make antitrust or competition law alone an inadequate foundation for an electricity market monitoring process. This paper provides examples of both the successes and failures of market monitoring from several international markets. More than ten years of experience with the electricity industry re-structuring process has demonstrated that market failures are more likely and substantially more harmful to consumers than other market failures because of how electricity is produced and delivered and the crucial role it plays in the modern...

California's Electricity Crisis: A Market Apart?