Competitive markets and capital investment: Evidence from US power plants

Abstract

A primary goal of competitive reform in electricity generation was to alter the incentives for new investment in power plants. I use the divestment of U.S. power plants to identify the causal effect of competitive reform on capital investment. Between 1990 and 2010, I find fossil power plants are 9.1% smaller, on average, after divestment. The effect is robust and precisely estimated. The change in size avoided approximately $25 billion in investment and is likely less than lost revenue, suggesting a gain in economic efficiency. The results document a new channel through which competitive markets reduce costs in electricity generation.