Abstract: This paper studies how electricity price volatility affects the investment dynamics of energy-intensive manufacturers. I first verify that investment is an important margin on which these manufacturers respond to electricity price changes. Using exogenous variation caused by changes in the natural gas price, I find that a ten percent increase in electricity prices is associated with a three percent reduction in capital expenditures. I next estimate a dynamic model of manufacturer investment with capital adjustment costs. When I simulate complete electricity market integration that reduces electricity price volatility by eighty percent, I find that dispersion in the marginal product of capital falls by four percent and profits rise by two percent. This suggests that policies that reduce electricity price volatility, such as building transmission to integrate electricity markets, will increase aggregate productivity in energy-intensive manufacturing. More generally, this paper shows how input price volatility can reduce static efficiency when production inputs are dynamic.
Non-refundable Tax Credits versus Grants: The Impact of Subsidy Form on the Effectiveness of Subsidies for Renewable Energy
Abstract: I study wind energy investment and the impact of awarding subsidies as non-refundable tax credits rather than as grants. Firms can only use non-refundable tax credits to reduce taxes. This feature may reduce the relative value of tax credits to wind developers. As a result, policies to stimulate investment through tax credits may be less effective. To quantify the tradeoff between investment subsidies, I take advantage of a temporary program which allowed wind developers to choose between a production-based, non-refundable tax credit and a cost-based, grant. I exploit geographic variation in productivity across wind projects to estimate a model of subsidy choice, and infer that wind developers valued a dollar of non-refundable tax credits the same as $0.85 of grant. I also find evidence consistent with non-refundable tax credit subsidies favoring incumbents, which are more likely to owe taxes than new entrants.
Work in Progress
Explaining the Dominance of Independent Power Producers in Renewable Energy
Two types of companies build the vast majority of electricity generation capacity in the U.S.: independent power producers (IPPs) and investor-owned utilities (IOUs). In the last decade, IPPs built the majority of renewable generation while IOUs built the majority of fossil fuel generation. This fact is puzzling because we might expect utilities to have a competitive advantage in building renewables: IOUs have lower borrowing costs than IPPs, and renewable energy projects have a higher ratio of sunk to variable costs than fossil fuel projects. I investigate the potential causes of this pattern, including an accounting rule that disadvantages IOUs in competing to build new projects.
Policy Uncertainty and Investment in Wind Energy (with Chenyu Yang)
The Production Tax Credit (PTC) is a large subsidy for investment in wind energy. While in place continuously since 1992, it was typically extended for a few years at a time. The events leading up to each renewal created considerable policy uncertainty for the wind power industry, and we study the effect of this uncertainty on investment. The graph below shows wind capacity additions in three of the four years the credit was allowed to expire on Dec 31 (solid red lines) before being retroactively renewed, as well as two years it came within six months of expiring (dotted red lines).