DEEP Research

The DEEP working paper series features the latest cutting-edge research by UC Davis faculty in the areas of Environmental and Energy Economics.

  • Setting with the Sun: The impacts of renewable energy on wholesale power markets
  • Authors: James Bushnell and Kevin Novan

    The United States has experienced a transformative level of investment in renewable electricity production capacity over the last decade. At the same time, operators of legacy power plants, particularly those fueled by coal and nuclear energy, are experiencing increasing financial distress. Across the US, a range of policy proposals and ad-hoc short term arrangements have been floated to maintain the economic viability of conventional generation. At the center of the debate over these proposals is the claim that subsidized renewable energy is the cause of this financial disruption. In this paper we examine the impact of renewable electricity expansion on power market prices and the consequent implications for the finances of conventional generators. In California, renewable capacity has roughly doubled in a span of 5 years, and the vast majority of the new capacity is solar. We find a mixed impact on power prices. While a substantial decline in daily average prices can be attributed to solar capacity expansion, this average price impact masks a substantial decrease in mid-day prices combined with an increase in shoulder hour prices. These results imply that short-term power markets are responding to the renewable expansion in a fashion that could sustain more flexible conventional generation, while seriously undermining the economic viability of traditional baseload generation technologies. Rather than representing a failure or market pricing, these results imply that market prices are adjusting to the reality of large-scale renewables in a way that rewards more flexible generation.
  • Regression Discontinuity in Time: Considerations for Empirical Applications
  • Authors: Catherine Hausman and David Rapson

    Recent empirical work in several economic fields, particularly environmental and energy economics, has adapted the regression discontinuity (RD) framework to applications where time is the running variable and treatment begins at a particular threshold in time. In this guide for practitioners, we discuss several features of this ``Regression Discontinuity in Time'' (RDiT) framework that differ from the more standard cross-sectional RD framework. First, many applications (particularly in environmental economics) lack cross-sectional variation and are estimated using observations far from the temporal threshold. This common empirical practice is hard to square with the assumptions of a cross-sectional RD, which is conceptualized for an estimation bandwidth shrinking even as the sample size increases. Second, estimates may be biased if the time-series properties of the data are ignored (for instance in the presence of an autoregressive process), or more generally if short-run and long-run effects differ. Finally, tests for sorting or bunching near the threshold are often irrelevant, making the framework closer to an event study than a regression discontinuity design. Based on these features and motivated by hypothetical examples using air quality data, we offer suggestions for the empirical researcher wishing to use the RD in time framework.
  • Attribute Substitution in Household Vehicle Portfolios
  • Authors: James Archsmith, Kenneth Gillingham, Christopher Knittel and David Rapson

    Household preferences for goods with a bundle of attributes may have complex substitution patterns when one attribute is changed. For example, a household faced with an exogenous increase in the size of one television may choose to decrease the size of other televisions within the home. This paper quantifies the extent of attribute substitution in the context of multi-vehicle households. We deploy a novel identification strategy to examine how an exogenous change in the fuel economy of a kept vehicle affects a household's choice of a second vehicle. We find strong evidence of attribute substitution in the household vehicle portfolio. This effect operates through car attributes that are correlated with fuel economy, including vehicle footprint and weight. Our findings suggest that attribute substitution exerts a strong force that may erode a substantial portion of the expected future gasoline savings from fuel economy standards, particularly those that are attribute-based. Elements of our identification strategy are relevant to a broad class of settings in which consumers make sequential purchases of durable portfolio goods.

  • Electricity Capacity Markets at a Crossroads

  • Authors: James Bushnell, Michaela Flagg, and Erin Mansur

    Almost twenty years after the initial restructuring of power markets in much of the United States, investments in generation and other supply resources are executed under three different resource adequacy (RA) paradigms.  All of these paradigms have proven capable of supporting investment of generation and other resources. New capacity has been added through each of these channels over the last 15 years. Policy question about resource adequacy are therefore not a matter of whether a particular paradigm can support any investment, but rather about the relative efficiency of investment and the performance of the resources that have been procured.  These questions are becoming more pressing with the emergence of several trends that are challenging traditional approaches to planning for, and securing, resource adequacy. These trends include low average overall energy prices, an influx of alternative resources, the growth of ISOs to encompass many States with heterogenous regulatory status and policy preferences.  In this paper we survey the historical foundations of resource adequacy policies and discuss how those foundations adapt to these new policy challenges.

  • California's Cap-and-Trade Market Through 2030: A Preliminary Supply/Demand Analysis

  • Authors: Severin Borenstein, James Bushnell, and Frank Wolak

    We extend our earlier analysis of the 2013-2020 cap-and-trade program (Borenstein, Bushnell, Wolak and Zaragoza-Watkins (2016)) to analyze the supply- demand balance in California’s cap-and-trade market for greenhouse gasses (GHGs) through 2030.  As we showed in our earlier work, there is significant uncertainty in the BAU emissions levels due to uncertainty in economic growth and other factors. Our analysis also illustrates how most of the planned abatement will not be sensitive to the price of allowances, although there is a large amount of uncertainty about the aggregate impact of these abatement sources. The combination of uncertainty in BAU emissions and in the supply of abatement implies a high probability that the equilibrium price of allowances evolves either to the price floor or to a price ceiling at which additional allowances would be released.  In our base case in which safety valve allowances from the Allowance Price Containment Reserve (APCR) are available only at a ceiling price $60 above the floor price and a hard price ceiling is enforced at that level, we find that there is a 34% probability of the price hitting this ceiling, a 47% probability of the price settling at the floor, and a 19% probability of a price between the floor and the ceiling. The distribution implies a probability-weighted expected price in 2030 of $51.62 (in 2015 real dollars). 

  • Utilities Included: Split Incentives in Commercial Electricity Contracts

  • Authors: Katrina Jessoe, Maya Papineau, and David Rapson

    The largest decile of commercial electricity customers comprises half of commercial sector electricity usage. We quantify that a substantial split incentives problem exists when these large rms are on electricity-included property lease contracts. Using exogenous variation in weather shocks, we show that customers on tenant-paid contracts use 6-14% less electricity in summer months. The policy implications are promising. Nationwide energy savings from aligning incentives for the largest 10% of commercial customers exceeds the savings from doing so for the entire residential electricity sector. It is also cost-eective: switching to tenant-paid contracts via sub-metering has a private payo period of under one year.

  • Fuel Subsidy Pass-Through and Market Structure: Evidence from the Renewable Fuel Standard​

  • Authors: Gabriel E. Lade and James B. Bushnell

    The Renewable Fuel Standard (RFS) is among the largest renewable energy mandates in the world. The policy is enforced using tradeable credits that implicitly subsidize biofuels and tax fossil fuels. The RFS relies on these taxes and subsidies to be passed through to consumers to stimulate demand for biofuels and decrease demand for gasoline and diesel. Using station-level prices for E85 (a high-ethanol blend fuel) from over 450 retail fuel stations, we show that pass-through of the ethanol subsidy is, on average, near complete. However, we find that full pass-through takes four to six weeks and that station-level pass-through rates exhibit substantial heterogeneity, with local market structure of stations influencing both the speed and overall level of pass-through. 

  • Residential Building Codes Do Save Energy: Evidence From Hourly Smart-Meter Data​

  • Authors: Kevin Novan, Aaron Smith, and Tianxia Zhao

    In 1978, California adopted building codes designed to reduce the energy used for heating, cooling, and water heating in buildings. Using a rich dataset of hourly electricity consumption for 158,112 California houses during 2012-13, we estimate that singlefamily homes built from 1980 through 1982 consumed on average 13% less electricity for cooling than premises constructed between 1975 through 1977. This estimate is similar to projected cooling-energy savings made using engineering models at the time the codes were enacted. We argue that the 1978 building codes easily pass a costbenefit test. Using monthly electricity consumption data, Levinson (2016) finds no evidence that post-1978 California houses use less energy to cool when the weather gets hot. Our results differ because our high-resolution data produce more precise estimates and eliminate a source of bias. In settings where agency problems and other potential market failures cause energy costs not to be passed through to the price of new houses, building energy codes can be a cost-effective policy.

  • The Incentive to Overinvest in Energy Efficiency: Evidence from Hourly Smart-Meter Data

  • Authors: Kevin Novan and Aaron Smith

    In most hours of most days, consumers of electricity pay a marginal price that exceeds the marginal social cost of providing that electricity. We show that such pricing schemes provide a large subsidy for energy efficiency investments. Using hourly smart-meter data for households facing increasing block prices, we estimate how air conditioner upgrades affect electricity use. We find that the average participating household reduces consumption by 5%. While the avoided consumption provides modest social cost savings by decreasing generation and pollution, we find that the private savings the households achieve on their energy bills exceed the social savings by 140%.​

  • Air Pollution and Criminal Activity: Evidence from Chicago Microdata

  • Authors: Evan Herrnstadt and Erich Muehlegger

    A large and growing literature documents the adverse impacts of pollution on health, productivity, educational attainment and socioeconomic outcomes. This paper provides the first quasi-experimental evidence that air pollution casually affects criminal activity. We exploit detailed location data on over two million serious crimes reported to the Chicago police department over a twelve-year period. We identify the causal effect of pollution on criminal activity by comparing crime on opposite sides of major interstates on days when the wind blows orthogonally the direction of the interstate and find that violent crime is 2.2 percent higher on the downwind side. Consistent with evidence from psychology on the relationship between pollution and aggression, the effect is unique to violent crimes – we find no effect of pollution on the commission of property crime.

  • Rethinking Trade-Exposure: The Incidence of Environmental Charges in the Nitrogenous Fertilizer Industry

  • Authors: James Bushnell and Jacob Humer

    The imposition of environmental regulations, such as greenhouse gas charges, to domestic manufacturing traditionally creates concerns over the impacts of those regulations on international competition and downstream product prices. The US Nitrogen fertilizer industry, an energy-intensive trade-exposed industry, has been considered by conventional metrics to be one of the most vulnerable to such effects. Since 2010 the industry has undergone increased concentration of producers and a dramatic reduction in US natural gas prices. While the decline in domestic gas prices has reduced production costs, it has not produced a corresponding decrease in fertilizer prices. Our research establishes that the pass-through of changes in natural gas prices, a key input to nitrogenous fertilizer, declined from roughly 80% prior to 2010 to effectively zero through 2014. One implication of this change in pricing dynamics is that the imposition of greenhouse gas (GHG) regulations on producers of nitrogen fertilizers would have almost no impact on fertilizer prices. Within the context of a GHG cap-and-trade program, the allocation of emissions allowances as considered under proposed Federal legislation, and as practiced in California today, would likely result in a transfer to fertilizer producers on the order of hundreds of millions of dollars with no impact on fertilizer prices or emissions.

  • From Cradle to Junkyard: Assessing the life cycle Greenhouse Gas Benefits of Electric Vehicles

  • Authors: James Archsmith, Alissa Kendall and David Rapson

    U.S. programs subsidize electric vehicles (EVs) in part to reduce greenhouse gas (GHG) emissions. We model a suite of life cycle GHG emissions considerations to estimate the GHG abatement potential from switching from an internal combustion engine vehicle (ICE) to an EV in the continental U.S. The GHG intensity of EVs hinges on the electricity and ambient temperature when charged and operated. Both have high spatial and temporal heterogeneity, yet are typically modeled inadequately or overlooked entirely. We calculate marginal emissions, including renewables, for electricity by region and test forecasted grid composition to estimate future performance. Location and timing of charging are important GHG determinants, but temperature effects on EV performance can be equally important. On average, EVs slightly reduce GHGs relative to ICEs, but there are many regions where EVs provide a decisive benefit and others where EVs are significantly worse. The forecasted grid shifts from coal towards renewables, improving EV performance; the GHG benefit per EV in western states is roughly $425 today and $2400 in 2040.

  • Policy Shocks and Market-Based Regulations: Evidence from the Renewable Fuel Standard

  • Authors: Gabriel E. Lade, C.-Y. Cynthia Lin and Aaron Smith

    The Renewable Fuel Standard (RFS2) is a US federal policy that mandates large increases in biofuel consumption and is implemented using a market for tradeable compliance credits. We develop a dynamic model of compliance with the RFS2 in which firms face uncertainty about future relative fuel prices and future enforcement of the mandate. Our model shows how changes in expected future enforcement can have dramatic effects on the price of compliance credits and thereby have large effects on the current cost of compliance. To illustrate, we estimate empirically the effect of three ‘policy shocks’ that reduced the expected 2014 mandates and introduced significant uncertainty regarding future compliance schedules. We estimate that one shock, the release of the 2013 Final Rule in which the Environmental Protection Agency suggested it would likely reduce the 2014 mandate, decreased the value of the subsidy (tax) provided by the RFS2 to the biofuel (fossil fuel) industry in 2013 by nearly $8 billion. Similar shocks followed with two subsequent events that released preliminary versions of the 2014 mandate reductions. We conclude that the goals of the RFS2 would be better served through active management of compliance credit markets.

  • Commodity Storage and the Market Effects of Biofuel Policies

  • Authors: Colin A. Carter, Gordon C. Rausser and Aaron Smith

    US legislation passed in 2007 (RFS2) increased by about 1.3 billion bushels the net amount of corn required to be processed annually into ethanol for motor-fuel use. Using modern time-series methods, we estimate that corn prices were about 30 percent higher between 2006 and 2014 than they would have been but for RFS2 and if pre-2006 trends had continued. We estimate a permanent corn demand increase of 1.3 billion bushels increased the long-run price by 31% (90% confidence interval is [5%,95%]). Our identification strategy is unique in the literature because it enables estimation of the effects of transitory shocks, such as weather, separately from the effects of persistent shocks, such as the ethanol mandate.

  • Commercial and Industrial Demand Response Under Mandatory Time-of-Use Electricity Pricing

  • Authors: Katrina Jessoe and David Rapson

    This paper is the first to evaluate the impact of a large-scale field deployment of mandatory time-
    of-use (TOU) pricing on the energy use of commercial and industrial firms. The regulation imposes higher user prices during hours when electricity is generally more expensive to produce, and is the most common way for time-varying incentives to be transmitted to retail electricity customers. We exploit a natural experiment that arises from the rules governing the program to present evidence that TOU pricing induced negligible change in overall usage, peak usage or peak load. As such, economic efficiency was not increased by this regulation. Bill levels and volatility exhibit only minor shifts, suggesting that concerns from advocacy groups about increased expenditure and customer risk exposure have been overstated.
  • Utilization and Customer Behavior: Smart Choice for the Smart Grid
  • Authors: Katrina Jessoe, Davis Rapson and Jeremy B. Smith

    The smart grid offers a wide array of opportunities to improve efficiency of the electricity grid via load management policies. This chapter reviews the current state of knowledge in the economics literature as it relates to time-varying pricing and to behavioral interventions, which together comprise a large portion of regulators’ policy choice set. The authors present evidence that consumers respond to financial incentives, but that these are not the only determinants of behavior. For example, consumers are often uninformed and inattentive, and exhibit a tendency to respond to non-monetary incentives as well as monetary. The authors conclude that time-varying pricing is an effective and essential policy instrument, while instruments designed to boost customer attentiveness and allow households to become better informed about their energy use play an important complementary role. Smart meters are crucial in making such a policy package feasible. The power of randomized experimental designs, which underlie much of the evidence that is presented, is also discussed. The authors highlight important areas for future research, and recommend that such future research efforts continue to leverage randomized designs.

  • Overlapping Environmental Policies and the Impact on Pollution 
  • Author: and Kevin Novan

  • Strategic Policy Choice in State-Level Regulation: The EPA's Clean Power Plan

  • Authors: James B. Bushnell, Stephen P. Holland, Jonathan E. Hughes and Christopher R. Knittel

    Flexibility in environmental regulations can lead to reduced costs if it allows additional abatement from lower cost sources or if policy tailoring and experimentation across states increases regulatory efficiency. The EPA’s 2014 Clean Power Plan, which implements greenhouse gas regulation of power plants under the Clean Air Act, allows substantial regulatory flexibility. The Clean Power Plan sets state-level 2030 goals for emissions rates (in lbs CO2 per MWh) with substantial variation in the goals across states. The Clean Power Plan allows states considerable flexibility in attaining these goals. In particular, states can choose whether to implement the rate-based goals or equivalent mass-based goals (i.e., emissions caps). Moreover, states can choose whether or not to join with other states in implementing their goals. Using a model of electricity generation across states, we analyze incentives to adopt inefficient rate-based standards versus efficient mass-based standards. We show that adoption of inefficient rate-based standards is a dominant strategy for states from both a consumer’s and a generator’s perspective. We calibrate the model for electricity markets in the Western United States and calculate significant inefficiencies from a failure to coordinate. In particular, state-by-state rate-based standards result in a substantial loss of welfare relative to business as usual. Even a harmonized West-wide rate-based standard dissipates a substantial proportion of the potential gains from regulation. Despite these large inefficiencies, the incentives for adoption of the inefficient policies are substantial particularly for generators.

  • The U.S. Electricity Industry after 20 Years of Restructuring

  • Authors: Severin Borenstein and James Bushnell

    Prior to the 1990s, most electricity customers in the U.S. were served by regulated, vertically-integrated, monopoly utilities that handled electricity generation, transmission, local distribution and billing/collections. Regulators set retail electricity prices to allow the utility to recover its prudently incurred costs, a process known as cost-of-service regulation. During the 1990s, this model was disrupted in many states by “electricity restructuring,” a term used to describe legal changes that allowed both non-utility generators to sell electricity to utilities – displacing the utility generation function and/or “retail service providers” to buy electricity from generators and sell to end-use customers – displacing the utility procurement and billing functions. We review the original economic arguments for electricity restructuring, the potential winners and losers from these changes, and what has actually happened in the subsequent years. We argue that the greatest political motivation for restructuring was rent shifting, not efficiency improvements, and that this explanation is supported by observed waxing and waning of political enthusiasm for electricity reform. While electricity restructuring has brought significant efficiency improvements in generation, it has generally been viewed as a disappointment because the price-reduction promises made by some advocates were based on politically-unsustainable rent transfers. In reality, the electricity rate changes since restructuring have been driven more by exogenous factors – such as generation technology advances and natural gas price fluctuations – than by the effects of restructuring. We argue that a similar dynamic underpins the current political momentum behind distributed generation (primarily rooftop solar PV) which remains costly from a societal viewpoint, but privately economic due to the rent transfers it enables.