Ex Post Payoffs of a Tolling Agreement for Natural Gas-Fired Generation in Texas

26 Pages Posted: 14 Jun 2016

See all articles by Yun Liu

Yun Liu

Hong Kong Baptist University (HKBU)

Chi-Keung Woo

The Hong Kong Institute of Education (HKIEd)

Jay Zarnikau

Frontier Associates LLC

Date Written: March 07, 2016

Abstract

To explore the problem of insufficient investment incentives for natural gas-fired generation in the Electricity Reliability Council of Texas (ERCOT), we use a large sample of over 134,000 fifteen-minute observations in the forty-six-month period from January 1, 2011 to October 31, 2014 to estimate the effects of several fundamental drivers on the ex post payoffs of three hypothetical tolling agreements by heat rate. Our assumed heat rates reflect those of a new combined cycle gas turbine (CCGT), a new combustion turbine (CT) and an old CT. The fundamental drivers are postulated to be the natural gas price, regional loads, nuclear generation and wind generation. We find that rising natural gas prices and non-West regional loads tend to increase the agreements’ ex post payoffs. However, these payoff increases were reduced by rising West regional loads, nuclear generation and wind generation. Finally, we find a substantial payoff decline due to large-scale wind generation development in Texas, lending support to the suggestion that ERCOT may transition from an energy-only market to an energy and capacity market.

Keywords: tolling agreement, ex post payoffs, natural gas-fired generation, investment incentive, Electricity Reliability Council of Texas (ERCOT)

Suggested Citation

Liu, Yun and Woo, Chi-Keung and Zarnikau, Jay, Ex Post Payoffs of a Tolling Agreement for Natural Gas-Fired Generation in Texas (March 07, 2016). Journal of Energy Markets, Vol. 9, No. 1, 2016, Available at SSRN: https://ssrn.com/abstract=2794967

Yun Liu (Contact Author)

Hong Kong Baptist University (HKBU) ( email )

Department of Economics
Kowloon, Hong Kong
Hong Kong

Chi-Keung Woo

The Hong Kong Institute of Education (HKIEd) ( email )

Rm 47, 1/F, Block B1, No. 10 Lo Ping Road
Tai Po, New Territories
Hong Kong

Jay Zarnikau

Frontier Associates LLC ( email )

1515 S Capital of Texas Hwy
Suite 110
Austin, TX 78746-6544
United States

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