Ex post payoffs of a tolling agreement for natural-gas-fired generation in Texas

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 non-West 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. Copyright © 2015 Incisive Risk Information (IP) Limited.