Competitive markets and capital investment: Evidence from US power plants

Abstract

To mitigate climate change, the US will need to invest billions in new power plants. However, cost-of-service regulation could lead electric utilities to “over-” invest, increasing costs for consumers. I evaluate if competition can achieve better societal outcomes by studying a set of power plants exposed to both regulated and competitive market structures. I find competitive reforms led to a large decrease in investment among power plants that use fossil fuels. Deregulated power plants did not operate less efficiently, suggesting the change increased welfare. The results imply that deregulation could be a tool to lower the infrastructure costs of decarbonization.