Saving for a Dry Day: Coal, Dams, and the Energy Transition
Sciences Po Economics Discussion Papers
Paris : Département d'économie de Sciences Po
Sciences Po Economics Discussion Papers : 2021-07
Energy transition, Renewables, Hydropower generation, Diversified production technologies, Energy storage, Wholesale electricity markets
Renewable generation creates a tradeoff between current and future energy production as generators produce energy by releasing previously stored resources. Studying the Colombian market, we find that diversified firms strategically substitute fossil fuels for hydropower before droughts. This substitution mitigates the surge in market prices due to the lower hydropower capacity available during dry periods. Diversification can increase prices, instead, if it results from mergers steepening a firm’s residual demand. Thus, integrating production technologies within firms can smooth the clean-energy transition by offsetting higher prices during scarcity periods if the unaffected technologies help store renewables more than exercise market power.