Working Paper: NBER ID: w20186
Authors: Lucas Davis; Catherine Hausman
Abstract: Reliable estimates of the value of electricity transmission are critical if these heavily-regulated investments are to be made cost-effectively. In this paper, we exploit the abrupt closure of the San Onofre Nuclear Generating Station (SONGS) in February 2012. During the previous decade, SONGS had produced about 8% of the electricity generated in California, so its closure had a pronounced impact on the wholesale market, requiring large and immediate increases in generation from other sources. We find that in the months following the closure, almost all of the lost generation from SONGS was met by natural gas plants inside California at an average cost of almost $68,000 per hour. During high demand hours, we find that as much as 75% of the lost generation was met by plants located in the southern part of the state. Although lower-cost production was available elsewhere, transmission constraints and other physical limitations of the grid severely limited the ability of other producers to sell into the southern California market. These constraints also made it potentially more profitable for certain plants to exercise market power, and we find evidence consistent with one company acting non-competitively. Overall, the constraints increased generation costs by an average of $4,500 per hour, implying that the value of additional transmission capacity is about $380 million.
Keywords: Electricity markets; Transmission value; Nuclear power plant closure; California
JEL Codes: L51; L94; Q41; Q54
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Closure of the San Onofre Nuclear Generating Station (SONGS) (L94) | Increased generation costs (L97) |
| Closure of the San Onofre Nuclear Generating Station (SONGS) (L94) | Increase in carbon dioxide emissions (Q54) |
| Closure of the San Onofre Nuclear Generating Station (SONGS) (L94) | Binding transmission constraints (L91) |
| Binding transmission constraints (L91) | Increased generation costs (L97) |
| Lost generation due to closure (J65) | Replacement by higher-cost natural gas plants (L94) |
| Lost generation due to closure (J65) | Significant divergence in prices between Northern and Southern California (H73) |