Essays in Competition and Investment in Electricity Market

Many jurisdiction has opened retail electricity markets to competition. In Texas, retailers offer hundreds of electricity plans with different prices. The first paper uses search cost and product differentiation to explain the price dispersion using only data on price. If search costs are present, the search burden can lead to market inefficiency. If product differentiation is the main cause of price dispersion, the market competition can increases consumer welfare. The model improves the current sequential search model by taking product differentiation into consideration. The results show that both product differentiation and search cost result in price dispersion. Product differentiation explains about 55% of the price dispersion. The magnitude of search costs is large and the counter-factual experiment shows that reduced search cost could reduce both market average price and price dispersion. The second paper uses a dynamic investment model to tackle three critical issues in renewable energy in the electricity industry. First, current renewable energy policies do not differentiate the carbon intensity of nonrenewable resources, which makes them less cost effective in reducing the carbon emission. Second, when making investment decisions, power plants take uncertainties into consideration. Lastly, the electricity generation market is unique that the players in the market not only compete in the hourly spot market but also compete with long-term investment strategies. A dynamic investment model considers all three issues simultaneously by simulating both short term and long term firm behavior under different market design parameter settings