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Natural Gas Prices and Coal Displacement: Evidence from Electricity Markets

46 Pages Posted: 12 Oct 2015  

Christopher R. Knittel

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Konstantinos Metaxoglou

Carleton University

Andre Trindade

Getulio Vargas Foundation (FGV) - FGV/EPGE Escola Brasileira de Economia e Finan├žas

Date Written: October 2015

Abstract

We examine the environmental impact of the post-2005 natural gas glut in the United States due to the shale gas boom. Our focus is on quantifying short-term coal-to-gas switching decisions by different types of electric power plants in response to changes in the relative price of the two fuels. In particular, we study the following entities: investor-owned utilities (IOUs) and independent power producers (IPPs) in restructured markets coordinated by Independent System Operators, as well as IOUs in traditional vertically-integrated markets. Using alternative data aggregations and model specifications, we find that IOUs operating in traditional markets are more sensitive to changes in fuel prices than both IOUs and IPPs in restructured markets. We attribute our findings to differences in available gas-fired generating capacity with the most cost-efficient technology: electricity generators reduced their rate of investment in the restructured markets post restructuring. The heterogeneity in the response of fuel consumption to prices has implications for carbon dioxide (CO2) emissions for the entities considered. Using simple back-of-the-envelope calculations, the almost 70% drop in the price of natural gas between June 2008 and the end of 2012 translates to as much as 33% reduction in CO2 emissions for IOUs in traditional markets, but only up to 19% for IOUs in restructured markets.

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Suggested Citation

Knittel, Christopher R. and Metaxoglou, Konstantinos and Trindade, Andre, Natural Gas Prices and Coal Displacement: Evidence from Electricity Markets (October 2015). NBER Working Paper No. w21627. Available at SSRN: https://ssrn.com/abstract=2672741

Christopher R. Knittel (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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E62-416
Cambridge, MA 02142
United States

National Bureau of Economic Research (NBER)

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Konstantinos Metaxoglou

Carleton University ( email )

Andre Trindade

Getulio Vargas Foundation (FGV) - FGV/EPGE Escola Brasileira de Economia e Finan├žas ( email )

Praia de Botafogo 190/1125, CEP
Rio de Janeiro RJ 22253-900
Brazil

HOME PAGE: http://https://sites.google.com/site/andretrindade/

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