Opportunity Cost Pass‐Through from Fossil Fuel Market Prices to Procurement Costs of the U.S. Power Producers

Abstract

This paper investigates the transmission of fossil fuel commodity spot market price changes to procurement costs of U.S. power producers. We measure and compare the speed and magnitude with which spot prices predict procurement costs using restricted access fuel price data. Natural gas spot prices are quickly reflected in procurement costs. Coal spot prices offer very little predictive power to coal procurement costs. Although not causal, the empirical results also show differences across regulatory status. These findings may have implications for the electricity market deregulation literature that creates marginal cost curves as a competitive benchmark.

Price freezes and gas pass-through: an estimation of the price impact of electricity market restructuring

“…The price path shown in Figure 12, of prices initially rising above the counterfactual and then falling below it, is exactly what would be expected of regulated rates that smooth market fluctuations over time. This pattern is consistent with findings in the literature of increased pass through rates in restructured markets compared to regulated ones (Chu et al 2017).…”

Coal-Fired Power Plant Retirements in the U.S

“…We choose to assign coal consumed in a month the weighted average price of coal deliveries because we consider that the opportunity cost of burning coal that month. See Chu, Holladay, and LaRiviere (2017) for more discussion of the trade-offs in this decision.…”

Vertical Separation of Transmission Control and Regional Production Efficiency in the Electricity Industry

“…The U.S. power producers primarily purchase coal via long-term contracts. Although the opportunity cost of using coal is the cost to purchase the replacement ton of coal, i.e., the commodity spot price of coal, the pass-through between the commodity spot prices and procurement costs of power plants is very low (Chu, Holladay and LaRiviere , 2017). Thus, coal commodity spot prices may not reflect the real costs of production for coal power plants.…”