The Energy Transition and the Grid
Paper Session
Friday, Jan. 5, 2024 8:00 AM - 10:00 AM (CST)
- Chair: James Archsmith, University of Maryland
Long-Run Dynamics of Industry Transition: A Structural Model of the Texas Electricity Market 2003-2019
Abstract
Environmental policy to mitigate climate change seeks to transform the capital composition of entire industries for the purpose of reducing carbon dioxide emissions. In restructured wholesale electricity markets, firms may exercise long-run market power through investment and power plant retirement decisions which affect future wholesale price settlement. I develop a dynamic structural model of the Texas electricity market spanning 2003-2019 to analyze how long-run market power exercise and environmental policy for reducing carbon emissions affect the capital composition of the industry over time. I find that market power exercise led to significant early fossil fuel plant retirements over this period, with an attendant decrease in consumer surplus on the order of $1.6 billion annually. I also find that federal production tax credits for wind power expanded the deployment of wind by approximately 73 percent, but the associated reductions in emissions were more than twice as costly as would have been achieved under a modest $20-per-ton carbon tax. To further examine the effects of environmental policy and market power on the industry transition, I decompose emissions reductions into those attributable to changes at the extensive margin (through the changing capital composition of the generation mix) and those attributable to changes at the intensive margin (through re-arranged dispatch order). This analysis suggests that, despite large differences in plant retirements attributable to market power exercise, a $20- per-ton carbon price achieves similar extensive-margin emissions paths whether or not the market is competitive. Under a wind production subsidy, in contrast, fossil fuel capital turnover is slowed in the presence of competition, leading to lower emissions reductions relative to the concentrated scenario.Backup Power: Public Implications of Private Substitutes for Electric Grid Reliability
Abstract
Private substitutes for electric grid reliability are common. We study their adoption and distributional implications. We first show that U.S. households buy substitutes in response to a perceived decrease in grid reliability and that higher-income households are more likely to adopt them. We then develop a theoretical model of public provision of grid reliability in the presence of private substitutes that is consistent with these facts. The existence of substitutes increases aggregate welfare and reduces the efficient level of reliability spending. Using a calibrated version of the model, we find that, even though only a few households adopt batteries, most non-adopting households benefit from their availability. Battery adoption reduces utilities' reliability spending, resulting in lower electricity bills for all customers. Most non-adopting households value these bill savings more than the reduced grid reliability.Climate Change, Renewable Energy Transition, and Power System Resilience
Abstract
While renewable energy sources are crucial for mitigating greenhouse gas emissions, their integration into the power system could pose challenges to the stability of power supply, especially when facing climate change-induced extreme weather shocks. Motivated by the growing share of renewable energy sources and the increasing frequency and intensity of climate change events worldwide, this paper empirically evaluates how extreme weather events affect the resilience of electricity system and the role of renewable energy in moderating or exacerbating such impacts. We construct a global panel of satellite-derived nighttime lights, weather conditions, natural disasters, power plants and electricity generation mix covering 199 countries from 2012 to 2020. Exploiting month-province variations in weather shocks and the heterogeneity in energy mix across regions in a two-way fixed effects model, we find that the effects of such shocks on power supply - as proxied by nighttime lights - vary by the type of shocks and sources of renewable energy. For instance, hydropower is particularly vulnerable to droughts and extreme heats, while wind turbines are susceptible to storms. One the other hand, higher renewable penetration could lead to power system more resilient to other extreme weather events such as floods. In addition, we examine the mechanisms through which renewable energy penetration affect power resilience by (1) examining the electricity generation and price responses; (2) evaluating heterogeneity across regions with different levels of electricity market integration and grid infrastructure. Overall, our research highlights the need for a comprehensive and integrated approach to achieve sustainable energy transition that not only steadily supports renewable energy development but also addresses the challenges that come with its integration into the power system.Discussant(s)
Jeffrey Shrader
,
Columbia University
Matthew Woerman
,
Colorado State University
Robert Harris
,
Georgia Institute of Technology
James Archsmith
,
University of Maryland
JEL Classifications
- Q4 - Energy
- Q5 - Environmental Economics