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Did the introduction of a nodal market structure impact wholesale electricity prices in the Texas (ERCOT) market?

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Abstract

Regression analysis suggests that zonal averages of locational marginal prices under the nodal market are about 2 % lower than the balancing energy prices that would occur under the previous zonal market structure in ERCOT. The estimates for the nodal market price effects are found after controlling for such factors as natural gas prices, total system load levels, non-dispatchable generation levels, the treatment of local congestion costs, and the treatment of the revenues received by the market from the auctioning of transmission rights. Our finding is limited to periods which are not characterized by price spikes in the wholesale market.

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Notes

  1. For a more technical explanation, see Dan Jones, Potomac Economics, MCPE and Offer Cap/Floor Consistency, etc., presentation to ERCOT TAC/WMS, June 13, 2008, available at: www.ercot.com/content/meetings/wms/keydocs/2008/0613/Jones_TAC_(20080613).ppt.

  2. Local transmission congestion cost data for each 15-min interval during the zonal market period were sought from ERCOT. However, these data are not available.

  3. We were unable to obtain comparable data for 2010.

  4. See Potomac Economics, IMM Report to the ERCOT Board of Directors, Sept. 18, 2012.

  5. These are posted on www.ercot.com under the monthly meeting materials of the Reliability and Operations Subcommittee.

  6. See http://planning.ercot.com/reports/demand-energy/. Note that users must register with ERCOT to request permission to access this website.

  7. See http://www.eia.gov/dnav/ng/hist/rngwhhdd.htm. Last accessed November 12, 2012.

  8. The results are very similar if the 95th percentile is used to construct the dummy variable for high demand.

  9. If one is interested in the impacts of a 1,000 MW change in baseload generation or the level of overall system demand upon wholesale prices, the coefficient estimates may be multiplied by 250 MWh (= 1,000 MW \(\times \) 15/60 min per hour), instead of 1,000 MWh.

  10. Please note that this market heat rate value is a weighted average of relevant heat rates in some periods and negligible impacts in other periods. It does not reflect the heat rates of particular power plants.

  11. Estimation of our model with no interactions between the nodal dummy variable and explanatory variables yield results suggesting there have been no savings from the switch to a nodal market structure. We are grateful for comments from an anonymous reviewer which convinced us of the need to include interactive variables to capture how the change in market structure affected the formulation of wholesale prices.

  12. In hopes of controlling for this effect, data on physical reserves for each 15-min period during the time the zonal market was in operation was requested. However, ERCOT was not able to fulfill this request.

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Acknowledgments

The authors would like to thank Dan Jones of Potomac Economics for discussions during the course of this work. We also wish to thank two anonymous referees and providing exceptionally detailed and valuable comments on earlier drafts.

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Authors and Affiliations

  1. Frontier Associates LLC, 1515 S. Capital of Texas Highway, Suite 110, Austin, TX, 78746, USA

    J. Zarnikau

  2. LBJ School of Public Affairs and Division of Statistics, The University of Texas at Austin, Austin, TX, 78712, USA

    J. Zarnikau

  3. Department of Economics, Hong Kong Baptist University, Hong Kong, Hong Kong

    C. K. Woo

  4. Energy and Environmental Economics, Inc., 101 Montgomery Street, San Francisco, CA, 94111, USA

    C. K. Woo

  5. Department of Electrical and Computer Engineering, The University of Texas at Austin, Austin, TX, 78712, USA

    R. Baldick

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  1. J. Zarnikau
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  2. C. K. Woo
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  3. R. Baldick
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Correspondence to J. Zarnikau.

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Zarnikau, J., Woo, C.K. & Baldick, R. Did the introduction of a nodal market structure impact wholesale electricity prices in the Texas (ERCOT) market?. J Regul Econ 45, 194–208 (2014). https://doi.org/10.1007/s11149-013-9240-9

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