Journal of Energy Markets

Electricity market prices for day-ahead ancillary services and energy: Texas

Jay Zarnikau, C.K. Woo, Shuangshuang Zhu, Ross Baldick, Chen-Hao Tsai and Jingwei Meng

  • We explore price formation in the day-ahead markets for electrical energy and ancillary services operated by the Electric Reliability Council of Texas.
  • The amounts of ancillary services required by the system operator and procured through the day-ahead market have been remarkably stable and have even very slightly declined over the 2011 to 2017 period, despite a large expansion in Texas’ wind generation.
  • The prices of ancillary services have also slightly declined, due to economic merit order effects induced by wind generation, changes in natural gas prices, the participation of interruptible loads in the market for responsive reserves, and other factors.
  • We find that the markets for responsive reserves and regulation-up are efficient, in the sense that a one-unit increase in day-ahead energy prices tends to increase the prices of those two operating reserves by roughly one unit.

Applying a regression-based approach to a large sample of hourly observations for the seven-year period of January 1, 2011 to December 30, 2017, we explore determinants of day-ahead market (DAM) prices for ancillary services (ASs) and energy in the Electric Reliability Council of Texas (ERCOT).  For each GW increase in responsive reserve (RRS) or nonspinning reserve (NSRS) procurement quantities, we estimate price increases of about US$3.47 per MW per hour and US$5.63 per MW per hour, respectively; while the cost of an additional 1 GW of regulation up (REGUP) and regulation down (REGDN) is a much higher US$17 per MW per hour and US$31 per MW per hour, respectively. A US$1/MWh increase in the DAM energy price tends to increase RRS and REGUP prices by nearly US$1 per MW per hour, about twice the estimated impact for NSRS that is not necessarily online when selected. The participation of interruptible loads to provide RRSs reduces the RRS price, and this effect increased nearly six-fold from the first to the second half of our sample time period. An increase in wind generation tends to decrease AS prices because it reduces the DAM energy price via the merit-order effect. Hence, Texas’s wind generation expansion has not raised ERCOT’s AS prices in our sample period, which is characterized by a stable AS requirement and declining natural gas prices. Going forward, however, Texas could face AS cost escalation due to the high REGUP and REGDN prices, should ERCOT’s requirement  and procurement of those services increase due to rising renewable production.

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