Will Retiring Coal-Fired Power Plants Lead To More Volatile Electricity Prices?

Low natural gas prices and environmental regulations have led many U.S. utilities to retire their coal-fired power plants and build new natural gas generators. But because coal prices tend to be more stable than natural gas prices, some worry that this trend will lead to more volatile electricity prices.

Anastasia Shcherbakova, an applied economist in the Texas A&M University Department of Agricultural Economics and research fellow with the Mosbacher Institute for Trade, Economics, and Public Policy, did the math. She and her collaborators examined data from the Pennsylvania-New Jersey-Maryland power grid to see what happens to electricity price volatility when coal generators unexpectedly go offline, and found that electricity price volatility was actually lower during hours when the natural gas generators were setting the price of electricity.

Shcherbakova concludes that because natural gas generators are more flexible and better able to respond to changing market conditions, they actually reduce price volatility, meaning that environmental benefits do not have to come at the expense of greater price risk.

“In fact, it is possible that environmental policies that have incentivized the switch from coal to gas generation in the United States created positive spillover effects for financial outcomes in power markets,” Shcherbakova writes. “While we do not know what would happen to price volatility in markets that divest from coal entirely in favor of natural gas and renewables, electricity market planners should consider the possible benefits of fuel switching when making infrastructure planning decisions.”

You can read about it in “Financial Implications of Coal-to-Gas Fuel Switching.”

The Takeaway is a publication of the Mosbacher Institute at Texas A&M’s Bush School of Government and Public Service.