Zsuzsanna Csereklyei & David Stern Technology Choices in the U.S. Electricity Industry before and after Market Restructuring IAEE Singapore Zsuzsanna Csereklyei & David Stern

Introduction We study the drivers of electricity generation technology adoption between 1970 and 2014 in the lower 48 U.S. states. Since the 1990s, major electricity market restructuring took place in some parts of the United States. We explore the implications of changing from a regulated “cost-of-service” or rate of return system to a partly or fully deregulated market  on technology and fuel choices.

How does access to wholesale markets influence this choice? Our questions: What drives investment choice of certain type of power plants, defined as a combination of fuel and technology (efficiency, peak vs. baseload)? In particular, how do own and substitute fuel prices impact on the choice of fuel and the efficiency level of the new plant (under regulated vs. wholesale markets)? How does access to wholesale markets influence this choice?

Power Plant Investments 1970-2014

Background US electricity market was characterised by a cost-of-service model before restructuring  regulated return on investment over the prudently incurred operating costs. US Energy Policies: PURPA 1978 (public utilities introducing IPP). Natural Gas Policy Act 1978  Natural Gas Wellhead Decontrol Act 1989  drop in natural gas prices. 1992 FERC O 636required gas pipeline companies to open to all transporters fall in natural gas prices Wholesale electricity market liberalization: driven by the difference in marginal vs. average costs late 1990s, 2000s, in states where economic incentives existed. FERC orders 888/889/2000

ISO/RTO Organization / North America Six of the seven ISO/RTOs started as preexisting power pools supported by states but regulated by federal laws. In wholesale markets natural gas prices, even though only a part the production portfolio tended to determine the marginal cost of electricity supply. Source: https://www.ferc.gov/industries/electric/indus-act/rto.asp

Real coal and natural gas prices delivered to the power sector

Assumptions Factors determining investment decision: Long run-demand, measured by GDP development Capacity additions and retirements before construction (or during) Average fuel prices before construction: own and substitute fuel prices  over 80% of operating cost for coal/gas plants. Marginal costs = (fuel cost) is impacting on dispatch ranking and determines the electricity price margin Efficient Market Hypothesis (current prices vs expected prices) Construction time duration (EIA and OECD data)

Model 1 Our basic model for each technology type:

Data Generator Data: EIA 860 Form: All generators from 1970 to 2014 that were connected to the grid and operational or retired. The EIA distinguishes over 20 technologies, and several subtechnologies for conventional steam coal. US GDP (1970 -2014) from the BEA. Coal, natural gas prices in the electricity generating sector from the EIA State Energy Data System (SEDS). Partly (wholesale only) or fully (wholesale and retail) restructured market dummies after Craig and Savage (2013).

Model 2

Robustness checks We also worked with different construction times (EIA construction times) We also added different (shorter) lags of the additions/retirements to account for plants in construction in a state during the investment decision.

Results

Results Positive effect of the liberalization of wholesale markets on the construction of natural gas combined cycle technologies, and a negative effect on a wide range of steam coal technologies, however high efficiency coal generators (including fluidized bed plants) are less negatively influenced by market liberalization. The incremental impact of fully liberalized markets is generally not statistically significant.

Results – Natural gas own fuel price elasticity The own price elasticity of natural gas plants is negative and significant for combined cycle generators in non-liberalized markets. In wholesale markets the elasticities are highly significant and more negative for both gas technologies. The coefficient for combined cycles is -1.67 and for gas turbines is -1.92, indicating a very elastic response in investment to gas price changes. Both coefficients are significant at the 1% level.

Results – Coal fired power own fuel price elasticity The own fuel price elasticity of coal is negative but not statistically significant for pulverized coal technologies in non-liberalized markets. In liberalized markets the effect is positive but only significant for subcritical plants at the 10% level.

Results – Cross price elasticities The cross price elasticities of natural gas and coal technologies are not statistically significant in non-liberalized markets. The cross price elasticities of coal technologies with respect to the price of natural gas in liberalized markets however show a clear investment substitution towards coal fired baseload generation in case of rising natural gas prices. The combined coefficients vary between 0.91 for supercritical and 1.02 for subcritical technologies and are significant at the 5% level. This would indicate about 1% increase in new coal capacity investment as a response to 1% increase in natural gas prices.

All natural gas and coal fired new capacities in the U. S All natural gas and coal fired new capacities in the U.S. as a % of the total 1970-2014.

Results Our results indicate that while market liberalization per se has increased investment flows into natural gas-fired plants, higher natural gas prices under competitive regimes acted to reduce these investments, as the relative profitability of other generation increased due to higher baseload usage, and higher margins. Also, while the average impact of liberalization was negative on coal-fired generators, natural gas prices under wholesale conditions promoted shifting investment from natural gas to other forms of electricity generation including renewables.

Conclusion / Implications Wholesale markets have significant impact on the choice of fuel and some impact on the choice of technology. Natural gas supply and prices have the potential to significantly shape the power generation landscape of states with wholesale electricity markets in future. However, strongly falling renewable generation costs have to be taken into account in the future. Price development on wholesale electricity markets

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