Essays in Energy Markets

Abstract

In this thesis, I empirically examine how strategic decisions of firms change under events such as input cost shocks and policy changes, in electricity markets. In the first chapter, I show that when the industry-wide cost shock impacts the cost of firms differently, the cost shock could change the strategic incentives of firms, which has important implications on the pass-through of the shock to prices. In the context of the New England electricity market, I show with a structural estimation that the extent of cost increase due to gas price shocks varies across firms and that this led to different levels of firm-level markup adjustments. The pass-through rates of cost shocks, which reflect different incentives for markup adjustments found in my analysis, are estimated to be heterogeneous as well, but close to one, on average. Because data does not fully capture heterogeneity in markup incentives or cost increases, I find that the reduced form pass-through estimate that relies only on data is underestimated compared to the rate implied by the structural estimation. In the second chapter, I examine how upcoming coal plant retirements in the New England electricity market affect the competition and market outcomes, especially when cost shocks occur. I reconstruct market conditions by letting coal plants to retire and replacing them with gas plants, which makes an increased proportion of the electricity generation in this market to be vulnerable to cost shocks caused by gas price shocks. I then simulate counterfactual outcomes with and without giving cost shocks to firms. I find that retirement causes electricity price to increase by 20 %, on average, and prices increase even further after retirement when a larger cost shock affects the market.