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

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  • Brehm, Paul A.
  • Zhang, Yiyuan

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 ~$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.

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  • Brehm, Paul A. & Zhang, Yiyuan, 2021. "The efficiency and environmental impacts of market organization: Evidence from the Texas electricity market," Energy Economics, Elsevier, vol. 101(C).
    • Handle: RePEc:eee:eneeco:v:101:y:2021:i:c:s0140988321002656
    DOI: 10.1016/j.eneco.2021.105359
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    3. Hou, Zheng & Roseta-Palma, Catarina & Ramalho, Joaquim J.S., 2024. "Can operational efficiency in the Portuguese electricity sector be improved? Yes, but..," Energy Policy, Elsevier, vol. 190(C).

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    More about this item

    Keywords

    Market design; Electricity markets; Congestion externality; Market power; Emissions;
    All these keywords.

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects

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