Regulatory Induced Risk Aversion: Coal Procurement at U.S. Power Plants

78 Pages Posted: 29 Jun 2018 Last revised: 2 Jan 2021

See all articles by Akshaya Jha

Akshaya Jha

Carnegie Mellon University

Date Written: December 31, 2020

Abstract

This paper provides empirical evidence that U.S. power plants exhibit risk aversion when purchasing coal. Specifically, I show that plants facing more spot coal price uncertainty sign longer duration coal contracts, purchase contract coal from a larger number of origin counties, and pay higher contract coal prices. The trade-off between the mean versus standard deviation of coal purchase costs implied by my results is considerably larger than the Sharpe Ratios typically estimated for commodity futures. I posit that power plants exhibit an especially high degree of risk aversion because regulators are less likely to incorporate high fuel cost realizations into the output price they set for these plants. In 2017, U.S. coal-fired plants emitted 1.2 billion tons of carbon dioxide and 74% of coal-fired electricity production came from price-regulated plants. My results thus underscore the importance of accounting for risk aversion when designing environmental policy aimed at reducing carbon emissions,

Keywords: Coal, Electricity, Risk Aversion, Output Price Regulation, Utilities, Sharpe Ratio, Carbon Policy

JEL Classification: K23, L51, L94, Q48

Suggested Citation

Jha, Akshaya, Regulatory Induced Risk Aversion: Coal Procurement at U.S. Power Plants (December 31, 2020). Available at SSRN: https://ssrn.com/abstract=2170547 or http://dx.doi.org/10.2139/ssrn.2170547

Akshaya Jha (Contact Author)

Carnegie Mellon University ( email )

Pittsburgh, PA 15213-3890
United States

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