Integrating electricity markets: Impacts of increasing trade on prices and emissions in the western United States

TL;DR

This study empirically analyzes how increased electricity trade in the western U.S. affects prices and emissions, showing imports lower prices and CO2 emissions in California but with complex effects on neighboring regions.

Contribution

It provides the first empirical estimates of trade impacts on prices and emissions in the western U.S. electricity market, highlighting trade's role in reducing California's emissions and prices.

Findings

Increased California imports lower wholesale prices by $0.15/MWh per GWh.

Trade is associated with a 70-ton reduction in CO2 emissions in the region.

Small increases in SO2 and NOx emissions are linked to neighboring coal plant activity.

Abstract

This paper presents empirically-estimated average hourly relationships between regional electricity trade in the United States and prices, emissions, and generation from 2015 through 2018. Consistent with economic theory, the analysis finds a negative relationship between electricity prices in California and regional trade, conditional on local demand. Each 1 gigawatt-hour increase in California electricity imports is associated with an average $0.15 per megawatt-hour decrease in the California Independent System Operator's wholesale electricity price. There is a net-negative short term relationship between carbon dioxide emissions in California and electricity imports that is partially offset by positive emissions from exporting neighbors. Specifically, each 1 GWh increase in regional trade is associated with a net 70-ton average decrease in CO2 emissions across the western U.S., conditional on demand levels. The results provide evidence that electricity imports mostly displace natural gas generation on the margin in the California electricity market. A small positive relationship is observed between short-run SO2 and NOx emissions in neighboring regions and California electricity imports. The magnitude of the SO2 and NOx results suggest an average increase of 0.1 MWh from neighboring coal plants is associated with a 1 MWh increase in imports to California.