Integrating energy markets: Implications of increasing electricity trade on prices and emissions in the western United States

Abstract

This paper presents empirically-estimated average hourly relationships between regional electricity trade in the western United States (U.S.) and prices, emissions, and generation from 2015 through 2018. Consistent with economic theory, the analysis finds a negative relationship between electricity price in California and regional trade, conditional on local demand. Each 1 gigawatt-hour (GWh) increase in California electricity imports is associated with an average $0.15 per megawatt-hour (MWh) decrease in the California Independent System Operator’s (CAISO) wholesale electricity price. There is a net-negative short-term relationship between carbon dioxide emissions in California and electricity imports that is partially offset by positive emissions from exporting neighbors. Specifically, each 1 GWh increase in regional trade is associated with a net 70-ton average decrease in CO₂ emissions across the western U.S., conditional on demand levels. The results provide evidence that electricity imports mostly displace natural gas generation on the margin in the California electricity market. A small positive relationship is observed between short-run SO₂ and NO_x emissions in neighboring regions and California electricity imports. The magnitude of the SO₂ and NO_x results suggest an average increase of 0.1 MWh from neighboring coal plants is associated with a 1 MWh increase in imports to California.