The Cost of Displacing Fossil Fuels: Some Evidence from Texas

Although technological progress can alter the relative costs of different energy sources, fossil fuels inevitably will be displaced as depletion raises their costs and makes them uncompetitive. They may be displaced sooner if they are taxed to internalize negative externalities. Currently, wind generation or nuclear power, supplemented by bulk electricity storage, are the most feasible alternatives to fossil fuels for electricity generation. The ERCOT ISO in Texas provides a realistic model for examining the costs of replacing fossil fuels by wind generation and storage, and for comparing wind power with generation based on nuclear and storage. ERCOT is relatively isolated from neighboring grids, and wind power was almost a quarter of its total generating capacity at the end of 2016. Using the ERCOT example, we also discuss how the long-run configuration of the electricity supply system affects evolution away from a system dominated by natural gas.