American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Start-up Costs and Market Power: Lessons from the Renewable Energy Transition
American Economic Review
vol. 115,
no. 2, February 2025
(pp. 690–724)
Abstract
Firms expect to recover the fixed costs required to start production by earning positive operating profits in subsequent periods. We develop a dynamic competitive benchmark that accounts for start-up costs, showing that static markups overstate the rents attributable to market power in an electricity market where generators frequently stop and start production in response to rooftop solar output. We demonstrate that the large-scale expansion of solar capacity can lead to increases in the collective profitability of fossil fuel plants because competition softens at sunset—plants displaced by solar during the day must incur start-up costs to compete in the evening.Citation
Jha, Akshaya, and Gordon Leslie. 2025. "Start-up Costs and Market Power: Lessons from the Renewable Energy Transition." American Economic Review 115 (2): 690–724. DOI: 10.1257/aer.20211145Additional Materials
JEL Classification
- D24 Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
- L13 Oligopoly and Other Imperfect Markets
- L25 Firm Performance: Size, Diversification, and Scope
- L94 Electric Utilities
- Q41 Energy: Demand and Supply; Prices
- Q42 Alternative Energy Sources