Excessive Entry, Investment and Congestion Cost in the Electricity Industry

Hill, Alexander McGavock

Graduate Thesis Or Dissertation

Excessive Entry, Investment and Congestion Cost in the Electricity Industry Public Deposited

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Citeable URL: https://scholar.colorado.edu/concern/graduate_thesis_or_dissertations/kd17cs86q

Abstract

Electricity is a large and crucial US industry, with annual sales and investment of $390 billion and $80 billion respectively. Two important topics in the industry, over the past 25 years, are the restructuring of state markets and variation electricity demand. Both changes occurred during the largest increase in electricity capacity in US history, the “Gas Boom,” which increased generating capacity by over 33 percent. This thesis links these topics with the increase in gas capacity and estimates their effect on electricity industry investment and prices.Chapter 1 estimates the effect of restructuring on US power plant investment, finding states that took steps toward retail competition built, on average, 593 MW more gas-fired CCGT power plants than if regulation had remained in place. Evidence of oversupply, bankruptcies, and falling capacity factors suggests this entry was excessive. Chapter 2 investigates the cause and cost of this excessive entry, finding it consistent with contagion, manager overconfidence, and falling long- term interest rates. The welfare cost is estimated to be $10.8 billion. Chapter 3 provides a first estimate of the impact of demand variance on electricity prices, finding an increase of 10 percent in demand variance leads to an increase of 9.7 percent in average state electricity prices. This impact was found to be significant across all three sectors of electricity use. These findings inform policymaker decisions in the future, suggesting states concern themselves with the lower and upper bound of capacity investment, while encouraging more measures to reduce daily and seasonal demand variation.

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