The efficiency and environmental impacts of market organization: Evidence from the Texas electricity market

Abstract

This paper examines the effect of market organization on efficiency and emissions in wholesale electricity markets. Taking advantage of Texas' transition from a decentralized bilateral trading market to a centralized auction market, we find that information aggregation has a positive effect on market efficiency that dominates any change in market power incentives. Specifically, we show that in the nine months following the transition, high-cost generators are displaced by low-cost generators in production, leading to annual cost savings of similar to$59 million relative to the counterfactual. Although the centralized market reduces generation costs, it also has an unintended effect on pollution emissions. For moderate marginal damage estimates, we find the increase in external costs of emissions completely offsets the productive efficiency gain. Keywords

Publisher

Elsevier

Publication Date

9-1-2021

Publication Title

Energy Economics

Department

Economics

Additional Department

Environmental Studies

Document Type

Article

DOI

https://dx.doi.org/10.1016/j.eneco.2021.105359

Keywords

Market design, Electricity markets, Congestion externality, Market power, Emissions

Language

English

Format

text

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