How Does Flexibility Affect Environmental Performance? Evidence from the Power Generation Industry

Problem definition: It is well known that the power sector requires flexibility, especially from fossil fuel–based power-generating units, to balance demand side variability and supply side fluctuations. However, the environmental consequences related to possessing and exercising such flexibility remain relatively unexplored. In this study, we examine the environmental impact of two forms of flexibility pertinent to power generation: fuel flexibility—that is, the ability to utilize multiple fuel types, and volume flexibility—that is, the ability to alter production volumes quickly. Methodology/results: We assembled a data set that spans 1998–2016 and includes details on fuel usage, power generation, generating unit characteristics, and carbon dioxide (i.e., CO 2 ) emissions for 3,135 fossil fuel power-generating units that account for more than 92% of the United States’ fossil fuel–generating capacity. Our empirical analysis reveals that power-generating units that possess fuel flexibility or volume flexibility generate greater CO 2 emissions than comparable nonflexible generating units. Additionally, when power-generating units exercise fuel flexibility (i.e., they use multiple fuel types in a period) or volume flexibility (i.e., they vary production to a greater degree in a period), they generate greater CO 2 emissions. By contrast, when power-generating units exercise both fuel and volume flexibility, we find that they diminish the aggregate emissions increases expected from exercising fuel or volume flexibility alone. Managerial implications: We add to the literature by exploring how flexibility affects environmental performance and by disambiguating the effects of possessing flexibility and exercising flexibility. These results are important when considering the penetration of renewables, the adoption of utility-grade storage, and demand response as each of these paths can significantly affect the flexibility burden placed on conventional sources of power. Thus, our results are relevant to policy makers and practitioners because they crystallize the environmental tradeoffs involved with deploying flexibility in fossil fuel–based power-generating units. Supplemental Material: The online appendix is available at https://doi.org/10.1287/msom.2023.0522 .