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CEIC-14-02

Consumer Cost Effectiveness of CO2 Mitigation Policies in Restructured Electricity Markets
Jared Moore and Jay Apt

Abstract:
We examine the cost of carbon dioxide mitigation to consumers in restructured markets under two policy instruments, a carbon price and renewable portfolio standards (RPS). To estimate the effect of policies on market clearing prices, we constructed an hourly economic dispatch model of the generators in PJM, ERCOT, and MISO. We find that the cost effectiveness of policies for consumers is strongly dependent on the price of natural gas and on the characteristics of the generators in the dispatch stack. If gas prices are low (~$4/MMBTU), a technology-agnostic, rational consumer seeking to minimize costs would prefer a carbon price over an RPS in every region. Expensive gas (~$7/MMBTU) requires a high carbon price to induce fuel switching and this leads to wealth transfers from consumers to low carbon producers. The RPS may be more cost effective for consumers because the added energy supply lowers market clearing prices and reduces CO2 emissions. We find that both policies have consequences in capacity markets and that the RPS can be more cost effective only if existing capacity supply remains adequate.
 

 

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