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  5. Renewable Generation and the Electricity Grid
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Renewable Generation and the Electricity Grid

Paper Session

Sunday, Jan. 8, 2023 10:15 AM - 12:15 PM (CST)

New Orleans Marriott, Galerie 1
Hosted By: Association of Environmental and Resource Economists
  • Chair: Andrew Yates, University of North Carolina-Chapel Hill

Carbon Pricing, Clean Energy Standards, and Clean Electricity Subsidies on the Path to Net Zero

Ryan Kellogg
,
University of Chicago
Severin Borenstein
,
University of California-Berkeley

Abstract

Momentum has built behind policies targeting drastic GHG emissions reductions from the electricity sector, perhaps all the way to zero. At the same time, there has been a de- bate between advocates of pricing carbon – through either a carbon tax or a cap-and-trade program – and proponents of a Clean Electricity Standard (CES) that would mandate that some share of all electricity generation come from clean sources. In general, the economics literature has identified several inefficiencies of CESs relative to mechanisms that directly price emissions. Specifically, CES policies fail to target fossil sources with especially high emissions rates, lead to lower output prices, and fail to raise revenue. Previous evaluations of CESs have, however, only considered in passing the case of ambitious policies that target nearly 100This insight then leads us to examine how emissions would evolve under carbon pricing or a CES during the transition to complete decarbonization. We develop a model that distills the following intuition: if the correlation between dirty generators’ emissions rates and their ongoing private operating costs is large and positive, then both the CES and carbon pricing will cause dirty generators to retire in nearly the same order during the transition, leading to similar emissions and welfare outcomes. We then use data on the U.S. fossil generation fleet to show that this condition holds in the U.S. for fuel prices that prevailed in 2019. Substantially higher natural gas prices, however, could reverse this finding.

Decomposing the Effect of Renewables on the Electricity Sector

Matt Woerman
,
University of Massachusetts Amherst
Paige Weber
,
University of North Carolina-Chapel Hill

Abstract

Renewables offer the potential for a dramatic reduction in electricity sector pollution, and continued cost reductions in these technologies may provide lower electricity prices. Yet, the growth of renewables is not without concern. Renewable resources possess unique characteristics—zero marginal cost, intermittency, and uncertainty—that may pose both technical and economic challenges to the operation of electricity grids. In this paper, we examine wind generation and wholesale electricity prices in the Texas electricity market, which features the greatest penetration of wind generation among all US electricity markets at nearly 20%. We estimate the overall effect of wind generation on electricity prices and price dispersion and then decompose these effects in terms of wind’s unique characteristics. We find that the zero marginal cost property of wind generation reduces both price levels and price dispersion and that these effects are heterogeneous by hour of day. Unforecast wind generation has over three times the effect on price levels as forecast wind, but hourly changes in wind generation have the same price effect as consistent wind generation. Finally, we find that the price effect from wind’s zero marginal cost property mirrors the price effect of a reduction of demand, but errors in wind forecasts have unique effects compared to errors in demand forecasts.

Investment, Emissions, and Reliability in Electricity Markets

Jonathan Elliott
,
Johns Hopkins University

Abstract

This paper studies how to design electricity markets to reduce emissions and prevent blackouts. Zero-emission renewable energy sources, such as wind and solar, are intermittent, which can lead to blackouts if the addition of renewables causes more reliable power plants to retire. To quantify the impact of electricity market policies, I build a structural equilibrium model of investment and dis-investment in generators of different energy sources. Oligopolistic firms make dynamic decisions to build or retire generators based on the profits they receive from wholesale electricity markets, which respond to the composition of generators in the market. Using data from the electricity market in Western Australia, I estimate this model and use it to simulate investment and production under counterfactual policies. Carbon taxes reduce emissions but, for certain values, can result in an increase in the likelihood of blackouts by causing retirement of coal and gas plants. Subsidizing capacity prevents this from occurring, but at the expense of a higher level of emissions. Using both policies together, however, keeps reliable, emissions-intensive generators in the market but prevents them from being used unless necessary, substantially lowering emissions while keeping the likelihood of blackouts low. I also explore alternative environmental policies, which are less effective at reducing emissions but have a lower cost to consumers.

Decarbonization and Electrification in the Long Run

Stephen Holland
,
University of North Carolina-Greensboro
Erin Mansur
,
Dartmouth College
Andrew Yates
,
University of North Carolina-Chapel Hill

Abstract

Decarbonization will require a completely transformed electricity grid. We analyze a long-run model that captures crucial aspects of the electricity industry such as time-varying demand for electricity, intermittency of renewables, optimal use of storage technologies, and entry and exit of generation and storage capacity. Long-run effects can differ in surprising ways from short-run intuition: An increase in electricity demand may lead to a decrease in emissions if it induces sufficient renewable entry; cheaper storage may lead to a decrease in renewable capacity by decreasing prices when renewables are operating; and a carbon tax can increase electricity consumption. Using hourly data for the U.S. market, we calibrate the model to evaluate decarbonization policies. A carbon price of $150 or more essentially eliminates carbon emissions. Given a modest decarbonization goal, a renewable subsidy performs better than a nuclear subsidy, but this ranking is reversed for an ambitious decarbonization goal. Policies promoting transmission or storage are unlikely to yield significant benefits unless paired with subsidies for renewables. Electrifying 100% of car miles traveled (thereby eliminating gasoline vehicle carbon emissions) would increase electricity-sector carbon emissions by 23-27% if vehicles are charged at night but could decrease electricity-sector carbon emissions if vehicles are charged during the day.

Discussant(s)
Sarah Armitage
,
EDF and Boston University
Daniel T. Kaffine
,
University of Colorado Boulder
Gordon Leslie
,
Monash University
Mar Reguant
,
Northwestern University
JEL Classifications
  • Q5 - Environmental Economics
  • Q2 - Renewable Resources and Conservation