Regulated U.S. electricity markets have transitioned from coal to natural gas more slowly than restructured markets. This contrasts with the predictions from canonical models of regulation that regulated utilities would over-invest in new capital because they are allowed a fair rate of return on capital. In addition, observers have alleged that regulated utilities are operating coal plants even when this is inefficient because they are subject to a “used and useful” standard the only allows them a return on power plants that they use sufficiently. The paper develops and estimates a dynamic model of energy transitions in regulated electricity markets that can explain these stylized facts. In the model of the authors, regulators reimburse utilities for the use of productive assets, while aiming to keep electric rates low by limiting returns on capital when prices to electricity consumers are high. In the short-run, utilities make hourly dispatch decisions to maximize profits given incentives set up by the regulatory structure. This regulatory structure provides two opposite incentives: utilities will overuse expensive coal plants to meet the used and useful standard but this overuse will be constrained to the extent that it results in high electricity prices. In the long-run, utilities decide which plants to retire and in which new technologies to invest. The authors show that regulation slowed the energy transition from coal to natural gas, and that it may have important consequences for the transition to renewable electricity generation.
Environmental, energy, and ecological problems have grown faster than their solutions. Economists have an important role to play to address these issues by using the latest science, rigorous methods and innovative policy solutions. The SWEEEP webinar series aims to convene the academic community to contribute to the scientific, economic, and policy discourses on important environmental and energy issues.
The seminar presentations are scheduled to last 60 minutes, with questions at the end.
The European Institute on Economics and the Environment is a partnership between Resources for the Future and Foundation CMCC. EIEE’s impartial economic and environmental research aims to facilitate the transition to a sustainable, inclusive society.
Contact: Professor Massimo Tavoni
The Energy Management research team at the Grenoble Ecole de Management (GEM) combines research on economics, strategic management, technology innovation and energy policy in order to create and share knowledge that will help society move towards a low-carbon future.
Contact: Professor Sébastien Houde
The ZEW – Leibniz Centre for European Economic Research is a leading German economic policy institute and a member of the Leibniz Association. ZEW's applied research aims to study and help design well-performing markets and institutions in Europe. In particular, it seeks to understand how to create a market framework that will enable the sustainable and efficient development of European economies.
Contact: Professor Sebastian Rausch
The Centre for Energy Policy and Economics (CEPE) was established in 1999 to complement the natural science and technical-oriented disciplines at ETH Zurich, by contributing to research and teaching in energy policy and economics. Through rigorous application of modern empirical methods, the goal of CEPE is to make critical contributions to the design and evaluation of energy and climate policy instruments.
Contact: Professor Massimo Filippini
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