Energy Transitions in Regulated Markets (WP-24-12)
Gautam Gowrisankaran, Ashley Langer, and Mar Reguant
Natural gas has replaced coal as the dominant fuel for U.S. electricity generation. However, U.S. states that regulate electric utilities have retired coal more slowly than others. The researchers build a structural model of rate-of-return regulation during an energy transition where utilities face tradeoffs between lowering costs and maintaining coal capacity. They find that the current regulatory structure retires only 45% as much coal capacity as a cost minimizer. A regulated utility facing a carbon tax does not lower carbon emissions immediately but retires coal similarly to the social planner. Alternative regulations with faster transitions clash with affordability and reliability goals.