In electricity markets, generators are rewarded both for providing energy and for enabling grid reliability. The two functions are compensated with two separate payments: energy market payments and ancillary services market payments. We provide evidence of changes in the generation mix in the energy market that are driven by exogenous changes in an ancillary services market. We provide a theoretical framework and quasi-experimental evidence for understanding the mechanism, showing that it results from the multi-product nature of power plants combined with discontinuities in costs. Although research in economics typically focuses solely on the energy market, our results suggest that spillovers between markets are important as well. Furthermore, policy changes relating to grid operations, grid reliability, or climate change could have unintended effects.

One fundamental question of economics is how consumers respond to price variation in the long run, with applications across a variety of fields. But there is a dearth of causally-identified long-run elasticity estimates, due to challenging empirical conditions. In this paper, I leverage a novel source of exogenous and persistent price variation to estimate the long-run price elasticity of demand in the setting of residential electricity. In this setting, I find that consumers are sixteen times as responsive to prices in the long run compared to the short-run, with elasticity estimates of -2.25 and -0.14 respectively. I explore mechanisms and find that in the long run, consumers respond differently to temperature across price regimes, with these differences accounting for 34% of the observed consumption differences. These findings highlight the potential impacts of price-based policies on demand and emphasize the importance of setting prices to reflect social marginal costs.