Econometrics & Applied Economics Seminar - Gordon Leslie (Monash University)

Title: How does rooftop solar penetration affect generator efficiency and market power? (joint work with Akshaya Jha)

Abstract: The rapid growth in electricity production from solar resources has decreased production from fossil-fuel fired generators. However, there are concerns that these thermal generators are more frequently required to take costly actions to quickly start up or ramp production in response to changes in solar production. This paper estimates these dynamic costs and examines how the rapid growth in rooftop solar installations in Western Australia has impacted the operation of thermal power plants. Over the 2015-2018 solar boom, we find that total fuel expenditures for thermal generators fell 10%, but that their total revenues increased 3%. This growth in gross margins is driven by an increased ability for generators to exercise market power at sunset, because fewer generators run during the day and they must now incur start up and ramp costs to compete at sunset. The results highlight the importance of designing electricity markets so that prices reflect both the contemporaneous and dynamic impact that production and consumption has on total system costs.