What Fuels the Volatility of Electricity Prices?

Abstract

Negative policy spillovers can undermine the social effectiveness of well-intentioned regulations. We evaluate whether environmental regulations that shifted electricity generation from coal to natural gas, reducing emissions, had an effect on electricity price volatility. We use emergency outages of coal generators as an exogenous source of variation in the power generation stack to study how changes in marginal fuel affect real-time prices. Contrary to anecdotal evidence, we find that wholesale prices are less volatile when natural gas is on the margin more often. Our results suggest that policy makers are not trading off greater environmental benefits for higher financial risks.

Keywords: Price Volatility, Natural Gas, Coal, Emergency Outages

JEL Classification: G1, G13, Q02, Q41