Blowing in the Wind: Vanishing Payoffs of a Tolling Agreement for Natural-gas-fired Generation of Electricity in Texas

• Published in: The Energy journal (Cambridge, Mass.) Vol. 33; no. 1; pp. 207 - 229
• Main Authors: Woo, Chi-Keung, Horowitz, Ira, Horii, Brian, Orans, Ren, Zarnikau, Jay
• Format: Journal Article
• Language: English
• Published: Los Angeles, CA Energy Economics Education Foundation, Inc 01.01.2012; SAGE Publications; Energy Economics Education Foundation; Sage Publications Ltd. (UK); International Association for Energy Economics
• Subjects: Adequacy; Applied sciences; Blowing; Buildings and facilities; Economic aspects; Economic data; Electric energy; Electric power; Electric power grids; Electric power production; Electricity; Electricity generation; Electricity prices; Energy; Energy economics; Energy policy; Energy trading; Exact sciences and technology; General, economic and professional studies; Market prices; Markets; Methodology. Modelling; Methods; Natural energy; Natural gas; Policies; Renewable energy; Statistical analysis; Statistical significance; Studies; System reliability; Tolls; Wind effects; Wind power; Wind power generation; United States; North America; Texas; America; United States > US; USA, Texas; Investment incentive; Wind generation; Spark spread option; Tolling agreement; Incentive; Econometric analysis; Wholesale market; Regression analysis; Market penetration; Wind energy; Electricity; Spot market; Profit; Production capacity; Economic impact; Electric power production; Contract; Natural gas; Investment
• ISSN: 0195-6574; 1944-9089
• DOI: 10.5547/ISSN0195-6574-EJ-Vol33-No1-8

We use a large Texas database to quantify the effect of rising wind generation on the payoffs of a tolling agreement for natural-gas-fired generation of electricity. We find that while a 20% increase in wind generation may not have a statistically-significant effect, a 40% increase can reduce the agreement's average payoff by 8% to 13%. Since natural-gas-fired generation is necessary for integrating large amounts of intermittent wind energy into an electric grid, our finding contributes to the policy debate of capacity adequacy and system reliability in a restructured electricity market that will see large-scale wind-generation development.