Market dynamics and investment in the electricity sector

A transition to a low carbon future will include a medium-to-long run period in which intermittent renewables co-exist with conventional fossil fuel electricity generators. Fossil fuel generators have frequent startups and shut-downs during the transition. A dynamic competition model is developed that allows for costly cycling of conventional generators. We analyze long run effects of renewable subsidies and carbon prices in the Electric Reliability Council of Texas system using the dynamic model. Accounting for costly generator cycling leads to large changes in equilibrium outcomes and changes policy predictions. The dynamic model predicts higher subsidies or carbon taxes are required to achieve CO2 reduction targets compared to a static model without costly generator cycling. The dynamic model predicts the cost of CO2 reduction is 40 - 80% greater than the static model prediction. The dynamic model predicts a much larger gap between CO2 reduction costs for carbon taxes and renewable subsidies; $303 million/year, compared to a static model prediction of $209 million/year.