California is considering the adoption of a cap-and-trade regulatory mechanism for regulating the greenhouse gas emissions from electricity and perhaps other industries. Two options have been widely discussed for implementing cap-and-trade in the electricity industry. The first is to regulate the emissions from electricity at the load-serving entity (LSE) level. The second option for implementation of cap-and-trade has been called the “first-seller” approach. Conceptually, under first-seller, individual sources (i.e. power plants) within California would be responsible for their emissions, as with traditional cap-and-trade systems. Emissions from imports would be assigned to the “importing firm.” An option that has not been as widely discussed is to implement a pure source-based system within California, effectively excluding imports from the cap-and-trade system altogether. This paper examines these three approaches to implementing cap-and-trade for California’s electricity sector. The paper surveys many of the issues relating to measurement and the impacts on bidding and scheduling incentives that are created by the various regulatory regimes.

In this paper, we describe a framework modeling for investment in restructured electricity markets. This framework is extremely flexible, and is designed to be able to capture many of the key considerations that distinguish investment in deregulated electricity markets from both investment in regulated markets, and investment in competitive markets for other commodities. The model is composed of two distinct elements: a detailed model of short-run, or ‘spot market’ competition in electricity markets, and a dynamic long-run equilibrium model of investment decisions of firms. The investment choices by firms will be driven by the underlying profits implied by the short-term markets under different investment paths. Firms will choose the investment paths that lead them to more profitable states of short-term markets.

We implement the framework for a representative electricity market and several qualitative insights can be demonstrated. First, the incentives of individual firms to invest very much depends upon their position in the market. Second, the impact of market structure on investment incentives is also influenced by the firms’ contractual or retail obligations in the market. Just as long-term contracts or retail obligations change a firm’s incentives in the short-term markets, so do they influence investment decisions. Third, increased uncertainty – in our case in demand growth – can delay investment. This is a demonstration of the option value of waiting for further information before making an irreversible investment.

Among the most contentious elements of the design of cap-and-trade systems for emissions trading is the allocation or assignment of the emissions credits themselves. Policy-makers usually try to satisfy a range of goals through the allocation process, including easing the transition costs for high-emissions firms, reducing leakage to unregulated regions, and mitigating the impact of the regulations on product prices such as electricity. In this paper we develop a detailed representation of the US western electricity market to assess the potential impacts of various allocation proposals. Several proposals involve the “contingent” allocation of permits, where the allocation is tied to the output, or input use, of plants. These allocation proposals are designed with the goals of limiting the pass-through of carbon costs to product prices, mitigating leakage, and of mitigating the costs to high-emissions firms. However, contingent allocation can greatly inflate permit prices, thereby limiting the benefits of such schemes to high emissions firms. Rather than mitigating the impact on high carbon producers, the net operating profit of such firms can actually be lower under contingent allocation than under auctioning. This is due to the fact that product prices (and therefore revenues) are lower under contingent allocation, but overall compliance costs are relatively comparable between auctioning and contingent allocation. Thus, the anticipated benefits from contingent allocation are greatly reduced and further distortions are introduced into the trading system.

This paper examines the impact of individual human operators on the fuel efficiency of power plants. Although electricity generation is a fuel and capital intensive enterprise, anecdotal evidence, interviews, and empirical analysis support the hypothesis that labor, particularly power plant operators, can have a non-trivial impact on the operating efficiency of the plant. We present evidence to demonstrate these effects and survey the policies and practices of electricity producing firms that either reduce or exacerbate fuel efficiency differences across individual plant operators.

This paper analyzes the effects of the New Source Review (NSR) environmental regulations on coal-fired electric power plants. The New Source Review program, which grew out of the Clean Air Act of 1970, required new plants to install costly pollution control equipment but exempted existing plants with a grandfathering clause. Previous theoretical research has shown that vintage differentiated regulations, like NSR, can lead to distortions, and if the distortions are large, the short-run effect of a regulation like NSR may be to increase pollution rather than reduce it. Older, dirtier plants may be kept in service longer or run more intensively since replacing them becomes more expensive. In the case of NSR, there is also an effect associated with its enforcement. Since upgrading a plant could potentially qualify it as a new plant, the old plants may have done less maintenance leading to lower efficiency and higher emissions. This paper attempts to estimate the extent to which these mechanisms have impacted coal-fired electric power plants. We find suggestive evidence that NSR increased operating lifetimes of plants in areas where environmental regulations were most stringent. We also find evidence that the risk of NSR enforcement reduced capital expenditures at plants. However, we find no discernable effect on the operating costs or fuel efficiency of these plants.

emissions. This paper summarizes the initiatives likely to impact the electricity generating sector. We present calculations showing that there is a substantial risk that two of the most prominent policies could simply result in a reshuffling, on paper, of the electricity generating resources within the West that are dedicated to serving California. This reshuffling is different from the conventional leakage problem as it involves no physical changes to the way electricity is generated across regulated and unregulated regions, but is instead driven by a contractual reshuffling of who buys power from whom. The problem is similar to an ineffective consumer boycott. The problem is still present but less severe if more Western states adopt carbon limitations. We also show that some of the least market-based initiatives, the renewable portfolio standards (RPS), are likely to have the biggest near-term impact on the carbon-intensity of electricity generation in the West. Thus the scale of RPS programs may be limiting the potential role of non-renewable options in reducing carbon emissions from the electricity sector.