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The Value of Transmission in Electricity Markets: Evidence from a Nuclear Power Plant Closure

Author

Listed:
  • 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.

Suggested Citation

  • Lucas Davis & Catherine Hausman, 2014. "The Value of Transmission in Electricity Markets: Evidence from a Nuclear Power Plant Closure," NBER Working Papers 20186, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:20186
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    References listed on IDEAS

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    Cited by:

    1. Danielle Devogelaer & Benoît Laine, 2016. "Working Paper 09-16 - Drivers of wholesale electricity prices in a small, open economy - Some evidence from the nuclear restart in Belgium [Working Paper 09-16 - Marché de l’électricité : facteurs ," Working Papers 1609, Federal Planning Bureau, Belgium.
    2. Grossi, Luigi & Heim, Sven & Waterson, Michael, 2014. "A vision of the European energy future? The impact of the German response to the Fukushima earthquake," The Warwick Economics Research Paper Series (TWERPS) 1047, University of Warwick, Department of Economics.
    3. Catherine Hausman & Ryan Kellogg, 2015. "Welfare and Distributional Implications of Shale Gas," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 46(1 (Spring), pages 71-139.

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    More about this item

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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