Energy Transitions in Regulated Markets

• Authors: Gautam Gowrisankaran, Ashley Langer and Mar Reguant
• American Economic Review, Vol. 116, 2928–2961, August 2026

Natural gas has replaced coal as the dominant fuel for US electricity generation. However, utilities in regulated US states have retired coal more slowly than others. We build a structural model of rate-of-return regulation during an energy transition where utilities face trade-offs between lowering costs and maintaining and using legacy capacity. A regulated utility facing carbon taxes lowers short-run coal generation 48 percent as much as a cost minimizer would. Thirty years after a sudden energy transition, a cost minimizer has retired 71 percent more coal capacity than the regulated utility. Alternative regulations may jeopardize affordability and reliability goals during energy transitions.