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Opportunity Cost Pass‐Through from Fossil Fuel Market Prices to Procurement Costs of the U.S. Power Producers
Author(s) -
Chu Yin,
Holladay J. Scott,
LaRiviere Jacob
Publication year - 2017
Publication title -
the journal of industrial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.93
H-Index - 77
eISSN - 1467-6451
pISSN - 0022-1821
DOI - 10.1111/joie.12146
Subject(s) - procurement , spot market , spot contract , deregulation , commodity , marginal cost , economics , market power , fossil fuel , electricity , microeconomics , coal , benchmark (surveying) , industrial organization , natural resource economics , business , commerce , financial economics , market economy , waste management , management , geodesy , geography , electrical engineering , monopoly , engineering , futures contract
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.