Discussion Paper

The Impact of Long-Term Generation Contracts on Valuation of Electricity Generating Assets under the Regional Greenhouse Gas Initiative

Aug 8, 2005 | Nathan E. Wilson, Karen L. Palmer, Dallas Burtraw


The Regional Greenhouse Gas Initiative is an effort by nine states to constrain carbondioxide emissions from the electric power sector using a cap-and-trade program. This paperassesses the importance of long-term electricity contracts under the program. We find that 12.2%of generation will be accounted for by long-term contracts in 2010, affecting select nuclear,hydroelectric, and cogeneration units. The contracts will have a negligible effect on the wholesalemarginal cost of electricity and a small effect on retail price. States may want to considercontracts on a case-by-case basis when making decisions about the initial distribution of emissionallowances, but they should account for effects on the portfolio of plants owned at the firm level,not the effects on individual facilities. Because of their relatively small effect, it seemsunnecessary to allow the existence of long-term contracts to dictate the design of the overallprogram.