Journal of Energy Markets

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

Chi-Keung Woo and Jay Zarnikau

  • We find an increase in ERCOT's non-West regional loads tends to increase the ex post payoffs. Although a natural-gas price increase raises the agreement's fuel cost, it likely enhances the ex post payoffs.
  • Declining nuclear generation tends to increase the ex post payoffs.
  • The hypothetical payoff increases may vanish because of rising wind generation.
  • Our 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.


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.


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