UC Berkeley

The energy industry is undergoing rapid transformation in the United States. Climate change continues to advance, leading to policies aimed at reducing emissions of greenhouse gases. Meanwhile, the costs of clean energy technologies are declining, leading to increased adoption by firms and consumers. These fundamental changes have led both firms and consumers to contend with a suite of new challenges. For consumers, emissions reduction policies and changes in generation costs have impacted retail prices. Firms, meanwhile, have needed to adapt to shifting grid policies and input costs. In this dissertation, I strive to understand how consumers and firms have responded to these changes in the electricity industry by asking two critical questions of economics: first, how do consumers respond to prices; and second, what are the spillover effects of a policy change? The first two chapters of this dissertation are devoted to the former question with particular attention to responses in the long run, while the final chapter examines the latter with focus on wholesale electricity markets.

In the first chapter of this dissertation, I study how electricity consumers respond to electricity prices in the short and medium run and evaluate heterogeneity in those responses along the income dimension. While the existing literature focuses primarily on the short run, understanding the dynamics of consumer demand over time is critical, as habit formation and durable good investment play an important role. I leverage a novel source of exogenous spatial price variation in combination with dynamic changes in price to evaluate how the responses of electricity consumers vary over time. Consumers are somewhat responsive in the short run, with a price elasticity of -0.36. Responses diminish over time but display some persistence, with an elasticity of -0.12 with respect to a three-year lagged prices. In addition, I evaluate the role that income plays in consumer response, finding that low-income consumers are less responsive to changes in price in both the short and medium run. These findings demonstrate the importance of accounting for consumption dynamics, especially in a setting where habit formation and durable goods play significant roles.

In the second chapter of this dissertation, I study how electricity consumers respond to electricity prices in the long run. Long-run elasticities are difficult to empirically estimate, and credible quasi-experimental estimates of long-run elasticities are rare, especially in the energy economics literature. However, long-run elasticities are crucial for calculating welfare, forecasting demand, and evaluating policy. Here, I leverage a novel source of plausibly exogenous long-lasting price variation for one of the first quasi-experimental estimates of the long-run price elasticity of demand for residential electricity consumers. I find that consumers are much more responsive to prices in the long run than the short run, with a long-run elasticity estimate of -2.4. Furthermore, I explore some of the mechanisms driving this price response, and find that residential adoption of rooftop solar alone can explain 26% of the observed response in consumption. My findings highlight the impact of price-based policies, and suggest that these types of policies may be more effective than previously thought in inducing energy transitions to cleaner technologies.

In the third chapter of this dissertation, in collaboration with Catherine Hausman, Johanna L Mathieu, and Jing Peng, I explore the spillover effects of policy changes in wholesale electricity markets. In electricity markets, generators are rewarded both for providing energy and for enabling grid reliability. The two functions are compensated with two separate payments: energy market payments and ancillary services market payments. We provide evidence of changes in the generation mix in the energy market that are driven by exogenous changes in an ancillary services market. We provide a theoretical framework and quasi-experimental evidence for understanding the mechanism, showing that it results from the multi-product nature of conventional power plants combined with discontinuities in costs. While research in economics typically focuses solely on the energy market, our results suggest that spillovers between markets are important as well. Furthermore, policy changes relating to grid operations, grid reliability, or climate change could have unintended effects.