Essays on Energy Economics and Market Structure: Investigating Catalysts for Entry and Exit

Broadly defined, this dissertation focused on the roles uncertainty, irreversibility, and environmental regulation played in firm entry and exit decisions in energy markets. A prominent innovation of this work was the integration of real options theory and applied econometric techniques. Uncertain energy prices combined with irreversible sunk costs of entry and exit create an economic benefit in delaying entry or exit, known as an option value. An option value approach to understanding firm decisions presents a more robust framework for capturing the impact of uncertainty and irreversibility on energy market structure. Chapters 1 and 2 utilized this modeling approach, while Chapter 3 used applied econometrics.As a result, this dissertation can be split into two major themes. The first is the role of uncertainty and irreversibility on market entry. Chapter 1 investigated whether a small firm, drilling less than 8 natural gas wells, would have entered the natural gas market during the hydraulic fracturing boom of the 2000s, given historic natural gas prices and reserves. Chapter 1 also examined if technological advances in hydraulic fracturing, horizontal drilling, and 3-D seismic imaging, land lease speculation, or a regime change in natural gas demand drove small firm entry. Each hypothesis was tested using a real options model of market entry and data on natural gas turnover.The second theme involves the role of uncertainty, irreversibility, and environmental regulation on energy market exit. Chapter 2 investigated this theme with both an optimal stopping model and an empirical analysis of the drivers of coal-fired electricity generator retirement. Chapter 2 developed and implemented a real options model of coal-fired generator retirement to back out the net retirement costs implied by the observed timing of nearly 200 retirement decisions between 2009 and 2015. Propensity score matching was utilized to assign a retirement cost for the remaining active fleet of coal generators, and the empirical analysis explored the impact of retirement costs on coal generator retirement decisions. Chapter 3 continued work on the second theme by employing a difference-in-differences identification strategy to determine the impact of mercury regulation on coal-fired electricity generator retirements.