Anastasia Shcherbakova, Texas A&M University

As natural gas plants displace increasingly more coal generation in U.S. electricity markets, some academics and policy makers have expressed concern that power prices will become more volatile. This is because fuel prices comprise a large component of marginal generation costs, and the price of natural gas has historically been much more volatile than the price of coal. In this study we test whether this is the case. We use emergency outages of coal and gas generators in PJM as an exogenous source of variation in the power generation stack to study how changes in the marginal fuel source affect real-time wholesale electricity prices. Our results cast significant doubt on anecdotal evidence that natural gas generation leads to higher electricity price volatility. We find that wholesale prices are less volatile when natural gas is on the margin more often. This benefit likely comes from gas generators’ flexibility, allowing them to respond to changes in market conditions more effectively. Our results suggest that on net, the benefits of gas integration exceed the costs, and by expanding natural gas generation capacity, policy makers will not be trading off greater environmental benefits for higher financial risks.