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

51 Pages Posted: 2 Jun 2014

See all articles by Lucas W. Davis

Lucas W. Davis

University of California, Berkeley - Haas School of Business; National Bureau of Economic Research (NBER)

Catherine Hausman

University of Michigan at Ann Arbor

Date Written: May 2014

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

Davis, Lucas W. and Hausman, Catherine, The Value of Transmission in Electricity Markets: Evidence from a Nuclear Power Plant Closure (May 2014). NBER Working Paper No. w20186, Available at SSRN: https://ssrn.com/abstract=2444573

Lucas W. Davis (Contact Author)

University of California, Berkeley - Haas School of Business ( email )

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2220 Piedmont Avenue
Berkeley, CA 94720
United States

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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Catherine Hausman

University of Michigan at Ann Arbor ( email )

500 S. State Street
Ann Arbor, MI 48109
United States

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