Incentives of carbon dioxide regulation for investment in low-carbon electricity technologies in Texas

This paper compares the incentives a carbon dioxide emissions price creates for investment in low carbon dioxide-emitting technologies in the electricity sector. We consider the extent to which operational differences across generation technologies – particularly, nuclear, wind and solar photovoltaic – create differences in the incentives for new investment, which is measured by the operating profits of a potential entrant. First, astylized model of an electricity system demonstrates that the composition of the existing generation system may cause electricity prices to increase by different amounts over time when a carbon dioxide price is imposed. Differences in operation across technologies therefore translate to differences in the operating profits of a potential entrant. Then, a detailed simulation model is used to consider a hypothetical carbon dioxide price of $10–$50 per metric ton for the Electric Reliability Council of Texas (ERCOT) market. The simulations show that, for the range of prices considered, the increase in electricity prices is positively correlated with output from a typical wind unit, but the correlation is much weaker for nuclear and photovoltaic. Consequently, a carbon dioxide price creates much stronger investment incentives for wind than for nuclear or photovoltaic technologies in the Texas market.