Power Trade, Welfare, and Air Quality

Abstract

We use detailed data from all generators in a major wholesale electricity market to investigate cross-border electricity trade and its impact on air emissions and social welfare. Using the technical characteristics of the generators and financial data we run a competition model every hour and find that the model generates actual prices and outputs with 94.4% and 96% accuracy, respectively. We show that there is a significant welfare gain from power trade. The air emissions savings are also considerable. For instance, when hourly imports double from current levels CO2 emissions decrease around 13%, and market prices reduce 5.4%. In autarky, CO2, SO2, NOx emissions increase 12%, 22%, 16%, resp., the prices go up 5.8%, and the price volatility rises 12%. However, the impact of negative wholesale prices on market outcomes is small.

Keywords: Electricity trade, interconnected markets, air emissions, welfare

JEL Classification: F18, L13, L94