U.S. Climate Policy and the Regional Economics of Electricity Generation

We examine the interaction between price competition and policy in four ISO markets by modeling the economic dispatch of generation technologies and the evolution of generation resources over a fifteen year period beginning in 2016. Using a representative range of forward prices for natural gas and other generator costs, we model three potential pathways for federal policy: (1) the status quo, which assumes no new federal initiatives through 2031; (2) moderate and aggressive (national or regional) RPSs; and (3) carbon taxes that vary in timing and amount. The model assesses the impact of these policies on competition between electricity generators using a range of output variables, including the cost of electricity, emissions of carbon dioxide (CO2), retirement and construction trends for generation resources, and dispatch rates of generation technologies. We analyze conditions in four regional electricity markets with distinct starting generation portfolios, demand profiles (that differ seasonally and diurnally), wind and solar resources, and fuel costs. Our results provide new insights into the competitive barrier that low gas prices represent for renewables, the superior efficacy of carbon taxes (even at low rates) over RPSs, and the singular competitive advantage renewables enjoy by virtue of having near zero marginal costs.