Working Paper: NBER ID: w23053
Authors: Steve Cicala
Abstract: This paper measures changes in electricity generation costs caused by the introduction of market mechanisms to determine output decisions in service areas that were previously using command-and-control-type operations. I use the staggered transition to markets from 1999- 2012 to evaluate the causal impact of liberalization using a nationwide panel of hourly data on electricity demand and unit-level costs, capacities, and output. To address the potentially confounding effects of unrelated fuel price changes, I use machine learning methods to predict the allocation of output to generating units in the absence of markets for counterfactual production patterns. I find that markets reduce production costs by $3B per year by reallocating output among existing power plants: Gains from trade across service areas increase by 20% based on a 10% increase in traded electricity, and costs from using uneconomical units fall 20% from a 10% reduction in their operation.
Keywords: electricity generation; market mechanisms; production costs; regulatory frameworks
JEL Codes: D4; D61; L1; L5; L94; Q4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| introduction of market mechanisms (D47) | production costs (D24) |
| reallocation of output among existing power plants (L94) | traded electricity (L94) |
| reallocation of output among existing power plants (L94) | costs associated with uneconomical units (M41) |
| market-based dispatch (D47) | gains from trade (F11) |
| market mechanisms (D47) | market efficiency (G14) |
| introduction of market mechanisms (D47) | efficiency in reallocating resources (D61) |