Energy and IO
Friday, Jan. 3, 2020 10:15 AM - 12:15 PM (PDT)
- Chair: Mar Reguant, Northwestern University
Innovation in the Wind Power Industry
AbstractWe study the impact of demand-side policy and imperfect competition on the path of technical progress in the market for wind turbines. A nice feature of this technology is that the underlying engineering challenge manufacturers face reduces to a simple physical relationship pertaining to the size of the device, which is low dimensional and readily observable. We relate changes in the realized engineering frontier to policy changes which spur demand, and recover innovation cost functions from a structural model of developer adoption and manufacturer innovation.
Market Size and Market Power: Evidence from the Texas Electricity Market
AbstractEconomic theory tells us that market structure is the primary determinant of a firm's ability to exercise market power. However, it is challenging to empirically estimate the causal effect of market structure on market power because a firm rarely experiences exogenous variation in its market's structure. In this paper, I exploit a novel source of exogenous variation in market size within the Texas electricity market---congestion of electricity transmission lines due to ambient temperature shocks---to estimate the causal effect of market size on the exercise of market power. When transmission lines congest, this statewide market splits into smaller localized markets. I find that a 10% reduction in market size causes firms to more than double markups. The direction of this effect is consistent with a model of oligopoly competition in which firms set markups in response to residual demand, which is less elastic in a smaller market. My results imply that the markups induced by transmission congestion at high temperatures generate $7.1--21.5 million of deadweight loss annually. These markups also create large transfers---$2.1 billion per year---from consumers to producers, which raise important equity concerns.
Wire, Wire, Plants For Hire? Transmission Constraints and Electricity Trade in India
AbstractThis paper studies the influence of transmission infrastructure on electricity market outcomes in a developing country context. Both economic theory and evidence based on ex ante structural simulations (Ryan (2017)) suggest that increasing electricity transmis- sion capacity should (i) decrease price dispersion between previously separated regions and (ii) reduce the overall cost of generation, by shifting production to lower-cost plants. We assemble a novel dataset on daily transmission capacities between regions of India’s power grid, in order to generate ex post empirical tests of these hypotheses. For the 5 percent of Indian electricity sold on a wholesale power market, we find that a 300 MW increase in transmission capacity leads to a 15 percent reduction in interregional prices wedges. However, for the remaining 95 percent of Indian electricity sold on bilateral contracts, we find that changes in transmission capacity have no detectable effect on either the quantity or the average variable cost of generation. These results suggest that given India’s current institutions and generating resources, the short-run economic benefits of incremental investments in transmission infrastructure are likely to be small.
- L9 - Industry Studies: Transportation and Utilities