Economics of Electricity Markets and Regulation Workshop Spring 2019

We use a detailed dataset on electricity transactions to investigate changes in market structure following the deregulation of the electricity sector, as well as the consequences for prices. We show that deregulation was effectively delayed by intermediate degrees of vertical integration, such as long-term contracts and common ownership. To account for these mechanisms, we look at the impact of effective deregulation: the portion of a market served by companies not related to the incumbent utility. We find that effective deregulation occurs several years after the initial vertical separation of incumbent utilities, and, when it occurs, prices increase. We examine wholesale market transactions in more detail using contracts for a subset of our data. We find that higher prices appear to be driven by purchases between affiliated companies, pointing to one mechanism by which an intermediate form of vertical integration plays a role.

Do Electricity Rates Affect Energy Efficiency Investment?
Empirical Evidence

The rapid growth in electricity production from solar resources has decreased the production by thermal (fossil fuel) generators. However, there is some concern regarding the “intermittency cost” of renewable generation: thermal generators are often required to take costly actions to start up or ramp production quickly in response to falling solar production when daylight ends or clouds form. This paper examines how the rapid growth in rooftop solar installations in Western Australia impacted the operation of gas-fired power plants in Western Australia. Corresponding to a 5-fold increase in rooftop solar from 2013-2018, we find that the aggregate market-wide heat rate (GJ of thermal energy divided by MWh of electricity production) increased by 5%. This fall in fleet efficiency is due to some base load generation with high start-up costs and low marginal costs drastically decreasing production. Our results suggest that markets will transition toward more flexible thermal technologies as solar penetration increases; this in turn increases the importance of incorporating market mechanisms for assigning the costs of balancing supply and demand at every instant.

Subsidies for renewable electricity generation frequently target the quantity of energy produced but ignore emissions resulting from changes in demand. I estimate the impact of policies that alter the generation or demand for electricity on polluting emissions, paying special attention to the impact on the rate and frequency with with fossil fuel plants are required to adjust output (ramp) to meet demand. Failing to account for the impacts of ramping overstate the emissions benefits of new solar PV and vastly understate the benefits of electricity storage technology. These results suggest policies targeting pollution reductions from electricity generation should account for the level and pattern of changes in supply and demand.

This paper examines how consumers respond to nonlinear prices. Exploiting a natural experiment with electricity consumers in British Columbia, I find evidence that some households severely misunderstand nonlinear prices--incorrectly perceiving that the marginal price applies to all consumption. While small in number, these households have a large effect in aggregate, masking an otherwise predominant response to average price. Previously largely unexplored in the literature, this type of misunderstanding has important economic and policy implications beyond electricity markets. I estimate the welfare loss for these households to be the equivalent of 10% of annual electricity expenditure.

Renewables, Market Design and Competition