Essays on regulations in the electricity industry

In this dissertation, I study the welfare consequences of environmental and price regulations in the electricity industry. I address two important questions. One is that what are the welfare consequences of allowing firms to self-select between different types of environmental regulations. Another is how does the choice of transmission congestion pricing structure affect the emission externalities and fuel efficiency in the wholesale markets. I answer these questions by exploring several policy experiments in the state of Texas in the United States. The first chapter is a general introduction to the Texas electricity industry and the conceptual framework of analysis in this dissertation. It consists of the institutional details of the industry, including market organizations, transmission congestion pricing structures, and emission regulations. Based on the institutional details, I discuss the theoretical implications and propose the empirical hypothesis for above research questions. In the second chapter, I evaluate the welfare consequences of allowing firms to self-select between cap-and-trade regulation and intensity standards using the data from a unique voluntary NO [subscript x] emission cap-and-trade program in Texas from 2001 to 2005. The welfare evaluation focuses on the effects of such mixed policy instruments on emissions, industry profits, and market exit. I construct and estimate a structural model of power generating units equilibrium choices of policy instrument, emission abatement, and production to recover their abatement costs. With the estimated parameters, I simulate the equilibrium outcomes under a counterfactual mandatory cap-and-trade regulation. Results reveal that the mixed policy framework mainly benefits small and high-cost generating units. However, the aggregate emissions are lower and the aggregate profits are higher under the mandatory cap-and-trade regulation. I also document that the mixed policy instruments lead to a higher exit rate of older generating units. In the year 2010, the Electric Reliability Council of Texas (ERCOT) changed from a zonal market structure to a nodal market structure to incorporate the cost of transmission congestion into the wholesale price. The third chapter compares the emission intensities and fuel efficiency of power generating units in the ERCOT before and after this regulatory change, to investigate its efficiency and environmental impacts in the congested areas. I find that the new nodal market structure has heterogeneous impacts on areas with different causes of transmission congestion. For counties located along the path to transferring wind generation from west Texas to east Texas, the nodal pricing leads to increases in emissions from fossil-fired power plants, although the total increase in emission cost is not economically significant. Contrarily, the nodal pricing increases the fuel efficiency by 2-9.6% for power plants located around congested areas with excess load, and the estimated fuel cost saving is around $154.8m. The results provide important policy implications for future transmission network planning.