Do Competitive Markets Clean Up the Us Electricity Sector? Evidence from the Southwest Power Pool

Abstract

Over several decades, there has been a move towards more integrated and competitive electricity markets, where the wholesale electricity price and dispatch is determined via system-operator auctions. However, the impact of such market reforms on non-market outcomes such as emissions is unclear. In this paper, we first delineate the potential channels through which increased competition via the day-ahead markets (DAM) might affect carbon emission rates (tons per MWh) of electricity generating units (EGUs) into the technique, composition and sorting effects. We then empirically quantify the environmental effects of the creation of DAM in the Southwest Power Pool (SPP) in 2014, using event-studies and difference-indifferences identification strategies using the Pennsylvania, New Jersey, and Maryland interconnection (PJM) as the comparison group. Finally, we quantify the relative significance of these three potential channels. We find that DAM reduces average emission rates of EGUs by 0.033 short tons per MWh, a roughly 4% reduction. This reduction is primarily driven by the sorting effect: emission-intensive and uneconomical EGUs retire following the intensified (import) competition after the DAM market reform. This reduction in average emission rates is equivalent to 7.66 million tonnes of carbon dioxide avoided per year post-DAM ($383.4 million US dollars in avoided damages).

Keywords: L51, L94, Q48, Q53