EX POST PAYOFFS OF A TOLLING AGREEMENT FOR NATURAL-GAS-FIRED
GENERATION IN TEXAS
Yun LIU, Hong Kong Baptist University, Phone: +852 59839567, email: 13479261@life.hkbu.edu.hk
Chi Keung Woo, Hong Kong Institute of Education, Phone: +852 34112177, email: CK@ethree.com
Jay Zarnikau, Frontier Associates LLC and University of Texas, Austin, Phone:+852 59829567 , email: jayz@frontierassoc.com
Overview
To explore the problem of insufficient investment incentive for natural-gas-fired generation in Electricity Reliability
Council of Texas (ERCOT), we use a large sample of over 134,000 15-minute observations in the 46-month period
of 01/01/2011 – 10/31/2014 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 rising natural-gas price and nonWest regional loads tend to increase the agreements’ ex post payoffs. These payoff increases, however, were reduced
by rising West regional load, 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 of ERCOT’s transition
from an energy-only market to an energy-and-capacity market.
We organize the paper as follows. Section 1 gives introduction. Section 2 presents our methodology. Section 3
describes our data sample. Section 4 reports our results. Section 5 concludes.
Methods
ITSUR regression based on a rich ERCOT data file.
Results
We find an increase in ERCOT’s non-West regional loads tends to increase the ex post payoffs. Although a naturalgas price increase raises the agreement’s fuel cost, it likely enhances the ex post payoffs. Similarly, declining nuclear
generation tends to increase the ex post payoffs. However, these payoff increases may vanish because of rising wind
generation. Taken together, these findings lend support to a suggestion of ERCOT’s eventual transition from an
energy-only market to an energy-and-capacity market, so as to mitigate the missing money problem magnified by the
state’s large-scale wind generation development.
Conclusions
The loss of nuclear generation and an increase in the natural-gas price can improve the investment incentives for
natural-gas-fired generation in Texas. However, this improvement can be negated by the state’s known wind
generation development. Hence, there may be insufficient investment incentives for natural-gas-fired generation units
that are critical for renewable integration and system reliability. Hence, ERCOT may eventually need a capacity
market to resolve its inadequate reserve margin and stalled investments in natural-gas-fired generation units; this is
notwithstanding that the investment in new natural gas plants no longer seems to be stalled, possibly due to newly
adopted the $9,000/MWH price offer cap on 01/01/2015.
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