IDEAS home Printed from https://ideas.repec.org/a/sae/enejou/v33y2011i1p207-230.html
   My bibliography  Save this article

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

Author

Listed:
  • Chi-Keung Woo
  • Ira Horowitz
  • Brian Horii
  • Ren Orans
  • Jay Zarnikau

Abstract

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. doi: 10.5547/ISSN0195-6574-EJ-Vol33-No1-9

Suggested Citation

  • Chi-Keung Woo & Ira Horowitz & Brian Horii & Ren Orans & Jay Zarnikau, 2011. "Blowing in the Wind: Vanishing Payoffs of a Tolling Agreement for Natural-gas-fired Generation of Electricity in Texas," The Energy Journal, , vol. 33(1), pages 207-230, January.
    • Handle: RePEc:sae:enejou:v:33:y:2011:i:1:p:207-230
    DOI: 10.5547/ISSN0195-6574-EJ-Vol33-No1-8
    as

    Download full text from publisher

    File URL: https://journals.sagepub.com/doi/10.5547/ISSN0195-6574-EJ-Vol33-No1-8
    Download Restriction: no
    File URL: https://libkey.io/10.5547/ISSN0195-6574-EJ-Vol33-No1-8?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Klinge Jacobsen, Henrik & Zvingilaite, Erika, 2010. "Reducing the market impact of large shares of intermittent energy in Denmark," Energy Policy, Elsevier, vol. 38(7), pages 3403-3413, July.
    2. Guthrie, Graeme & Videbeck, Steen, 2007. "Electricity spot price dynamics: Beyond financial models," Energy Policy, Elsevier, vol. 35(11), pages 5614-5621, November.
    3. Markus Burger & Bernhard Klar & Alfred Muller & Gero Schindlmayr, 2004. "A spot market model for pricing derivatives in electricity markets," Quantitative Finance, Taylor & Francis Journals, vol. 4(1), pages 109-122.
    4. Mount, Timothy D. & Ning, Yumei & Cai, Xiaobin, 2006. "Predicting price spikes in electricity markets using a regime-switching model with time-varying parameters," Energy Economics, Elsevier, vol. 28(1), pages 62-80, January.
    5. Knittel, Christopher R. & Roberts, Michael R., 2005. "An empirical examination of restructured electricity prices," Energy Economics, Elsevier, vol. 27(5), pages 791-817, September.
    6. Haldrup, Niels & Nielsen, Morten Orregaard, 2006. "A regime switching long memory model for electricity prices," Journal of Econometrics, Elsevier, vol. 135(1-2), pages 349-376.
    7. Li, Y. & Flynn, P.C., 2006. "Electricity deregulation, spot price patterns and demand-side management," Energy, Elsevier, vol. 31(6), pages 908-922.
    8. Hoogwijk, Monique & de Vries, Bert & Turkenburg, Wim, 2004. "Assessment of the global and regional geographical, technical and economic potential of onshore wind energy," Energy Economics, Elsevier, vol. 26(5), pages 889-919, September.
    9. Hendrik Bessembinder & Michael L. Lemmon, 2002. "Equilibrium Pricing and Optimal Hedging in Electricity Forward Markets," Journal of Finance, American Finance Association, vol. 57(3), pages 1347-1382, June.
    10. Paul L. Joskow & Edward Kohn, 2002. "A Quantitative Analysis of Pricing Behavior in California's Wholesale Electricity Market During Summer 2000," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 1-35.
    11. Stratford M. Douglas & Julia N. Popova, 2011. "Econometric Estimation of Spatial Patterns in Electricity Prices," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 81-106.
    12. Newbery, David, 2010. "Market design for a large share of wind power," Energy Policy, Elsevier, vol. 38(7), pages 3131-3134, July.
    13. Marckhoff, Jan & Wimschulte, Jens, 2009. "Locational price spreads and the pricing of contracts for difference: Evidence from the Nordic market," Energy Economics, Elsevier, vol. 31(2), pages 257-268, March.
    14. Bunn, Derek W. & Fezzi, Carlo, 2007. "Interaction of European Carbon Trading and Energy Prices," Climate Change Modelling and Policy Working Papers 9092, Fondazione Eni Enrico Mattei (FEEM).
    15. Derek W. Bunn & Carlo Fezzi, 2007. "Interaction of European Carbon Trading and Energy Prices," Working Papers 2007.63, Fondazione Eni Enrico Mattei.
    16. Shi-Jie Deng & Zhendong Xia, 2006. "A Real Options Approach For Pricing Electricity Tolling Agreements," International Journal of Information Technology & Decision Making (IJITDM), World Scientific Publishing Co. Pte. Ltd., vol. 5(03), pages 421-436.
    17. Zarnikau, Jay, 2011. "Successful renewable energy development in a competitive electricity market: A Texas case study," Energy Policy, Elsevier, vol. 39(7), pages 3906-3913, July.
    18. Janczura, Joanna & Weron, Rafal, 2010. "An empirical comparison of alternate regime-switching models for electricity spot prices," Energy Economics, Elsevier, vol. 32(5), pages 1059-1073, September.
    19. Benth, Fred Espen & Koekebakker, Steen, 2008. "Stochastic modeling of financial electricity contracts," Energy Economics, Elsevier, vol. 30(3), pages 1116-1157, May.
    20. Hendrik Bessembinder & Michael L. Lemmon, 2006. "Gains from Trade under Uncertainty: The Case of Electric Power Markets," The Journal of Business, University of Chicago Press, vol. 79(4), pages 1755-1782, July.
    21. Dubin, Jeffrey A & McFadden, Daniel L, 1984. "An Econometric Analysis of Residential Electric Appliance Holdings and Consumption," Econometrica, Econometric Society, vol. 52(2), pages 345-362, March.
    22. Neuhoff, Karsten & De Vries, Laurens, 2004. "Insufficient incentives for investment in electricity generations," Utilities Policy, Elsevier, vol. 12(4), pages 253-267, December.
    23. Deng, S.J. & Oren, S.S., 2006. "Electricity derivatives and risk management," Energy, Elsevier, vol. 31(6), pages 940-953.
    24. Steggals, Will & Gross, Robert & Heptonstall, Philip, 2011. "Winds of change: How high wind penetrations will affect investment incentives in the GB electricity sector," Energy Policy, Elsevier, vol. 39(3), pages 1389-1396, March.
    25. Woo, C.K. & Zarnikau, J. & Moore, J. & Horowitz, I., 2011. "Wind generation and zonal-market price divergence: Evidence from Texas," Energy Policy, Elsevier, vol. 39(7), pages 3928-3938, July.
    26. Haldrup Niels & Nielsen Morten Ø., 2006. "Directional Congestion and Regime Switching in a Long Memory Model for Electricity Prices," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 10(3), pages 1-24, September.
    27. Park, Haesun & Mjelde, James W. & Bessler, David A., 2006. "Price dynamics among U.S. electricity spot markets," Energy Economics, Elsevier, vol. 28(1), pages 81-101, January.
    28. Severin Borenstein & James B. Bushnell & Frank A. Wolak, 2002. "Measuring Market Inefficiencies in California's Restructured Wholesale Electricity Market," American Economic Review, American Economic Association, vol. 92(5), pages 1376-1405, December.
    29. Johnsen, Tor Arnt, 2001. "Demand, generation and price in the Norwegian market for electric power," Energy Economics, Elsevier, vol. 23(3), pages 227-251, May.
    30. repec:bla:jfinan:v:59:y:2004:i:4:p:1877-1900 is not listed on IDEAS
    31. Alagappan, L. & Orans, R. & Woo, C.K., 2011. "What drives renewable energy development?," Energy Policy, Elsevier, vol. 39(9), pages 5099-5104, September.
    32. Rafal Weron, 2006. "Modeling and Forecasting Electricity Loads and Prices: A Statistical Approach," HSC Books, Hugo Steinhaus Center, Wroclaw University of Science and Technology, number hsbook0601, December.
    33. De Vany, Arthur S & Walls, W David, 1999. "Price Dynamics in a Network of Decentralized Power Markets," Journal of Regulatory Economics, Springer, vol. 15(2), pages 123-140, March.
    34. Pollitt, M.G., 2010. "UK Renewable Energy Policy Since Privatisation," Cambridge Working Papers in Economics 1007, Faculty of Economics, University of Cambridge.
    35. Paul R. Kleindorfer & Lide Li, 2005. "Multi-Period VaR-Constrained Portfolio Optimization with Applications to the Electric Power Sector," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 1-26.
    36. Karakatsani, Nektaria V. & Bunn, Derek W., 2008. "Intra-day and regime-switching dynamics in electricity price formation," Energy Economics, Elsevier, vol. 30(4), pages 1776-1797, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Martínez, Beatriz & Torró, Hipòlit, 2018. "Hedging spark spread risk with futures," Energy Policy, Elsevier, vol. 113(C), pages 731-746.
    2. Woo, C.K. & Shiu, A. & Liu, Y. & Luo, X. & Zarnikau, J., 2018. "Consumption effects of an electricity decarbonization policy: Hong Kong," Energy, Elsevier, vol. 144(C), pages 887-902.
    3. Levin, Todd & Botterud, Audun, 2015. "Electricity market design for generator revenue sufficiency with increased variable generation," Energy Policy, Elsevier, vol. 87(C), pages 392-406.
    4. Woo, C.K. & Milstein, I. & Tishler, A. & Zarnikau, J., 2019. "A wholesale electricity market design sans missing money and price manipulation," Energy Policy, Elsevier, vol. 134(C).
    5. Woo, C.K. & Moore, J. & Schneiderman, B. & Ho, T. & Olson, A. & Alagappan, L. & Chawla, K. & Toyama, N. & Zarnikau, J., 2016. "Merit-order effects of renewable energy and price divergence in California’s day-ahead and real-time electricity markets," Energy Policy, Elsevier, vol. 92(C), pages 299-312.
    6. Chi-Keung Woo & Ira Horowitz & Jay Zarnikau & Jack Moore & Brendan Schneiderman & Tony Ho & Eric Leung, 2016. "What Moves the Ex Post Variable Profit of Natural-Gas-Fired Generation in California?," The Energy Journal, , vol. 37(3), pages 29-57, July.
    7. J. Zarnikau & C. Woo & R. Baldick, 2014. "Did the introduction of a nodal market structure impact wholesale electricity prices in the Texas (ERCOT) market?," Journal of Regulatory Economics, Springer, vol. 45(2), pages 194-208, April.
    8. Ricardo Gonçalves & Flávio Menezes, 2022. "Market‐wide impact of renewables on electricity prices in Australia," The Economic Record, The Economic Society of Australia, vol. 98(320), pages 1-21, March.
    9. Zarnikau, J. & Woo, C.K. & Zhu, S. & Tsai, C.H., 2019. "Market price behavior of wholesale electricity products: Texas," Energy Policy, Elsevier, vol. 125(C), pages 418-428.
    10. Woo, C.K. & Sreedharan, P. & Hargreaves, J. & Kahrl, F. & Wang, J. & Horowitz, I., 2014. "A review of electricity product differentiation," Applied Energy, Elsevier, vol. 114(C), pages 262-272.
    11. Woo, C.K. & Chen, Y. & Olson, A. & Moore, J. & Schlag, N. & Ong, A. & Ho, T., 2017. "Electricity price behavior and carbon trading: New evidence from California," Applied Energy, Elsevier, vol. 204(C), pages 531-543.
    12. Kang Hua Cao & Han Qi & Chi-Keung Woo & Jay Zarnikau & Raymond Li, 2024. "Efficient Frontiers for Short-term Sales of Spot and Forward Wind Energy in Texas," The Energy Journal, , vol. 45(6), pages 37-60, November.
    13. Spodniak, Petr & Bertsch, Valentin, 2017. "Determinants of power spreads in electricity futures markets: A multinational analysis," Papers WP580, Economic and Social Research Institute (ESRI).
    14. Barbose, Galen & Wiser, Ryan & Heeter, Jenny & Mai, Trieu & Bird, Lori & Bolinger, Mark & Carpenter, Alberta & Heath, Garvin & Keyser, David & Macknick, Jordan & Mills, Andrew & Millstein, Dev, 2016. "A retrospective analysis of benefits and impacts of U.S. renewable portfolio standards," Energy Policy, Elsevier, vol. 96(C), pages 645-660.
    15. Woo, C.K. & Ho, T. & Zarnikau, J. & Olson, A. & Jones, R. & Chait, M. & Horowitz, I. & Wang, J., 2014. "Electricity-market price and nuclear power plant shutdown: Evidence from California," Energy Policy, Elsevier, vol. 73(C), pages 234-244.
    16. Dong-Hyun Kim & Eul-Bum Lee & In-Hyeo Jung & Douglas Alleman, 2019. "The Efficacy of the Tolling Model’s Ability to Improve Project Profitability on International Steel Plants," Energies, MDPI, vol. 12(7), pages 1-18, March.
    17. Consolación Quintana-Rojo & Fernando-Evaristo Callejas-Albiñana & Miguel-Ángel Tarancón & Isabel Martínez-Rodríguez, 2020. "Econometric Studies on the Development of Renewable Energy Sources to Support the European Union 2020–2030 Climate and Energy Framework: A Critical Appraisal," Sustainability, MDPI, vol. 12(12), pages 1-26, June.
    18. Zarnikau, J. & Zhu, S. & Woo, C.K. & Tsai, C.H., 2020. "Texas's operating reserve demand curve's generation investment incentive," Energy Policy, Elsevier, vol. 137(C).
    19. Cao, K.H. & Qi, H.S. & Tsai, C.H. & Woo, C.K. & Zarnikau, J., 2021. "Energy trading efficiency in the US Midcontinent electricity markets," Applied Energy, Elsevier, vol. 302(C).
    20. Sreedharan, P. & Farbes, J. & Cutter, E. & Woo, C.K. & Wang, J., 2016. "Microgrid and renewable generation integration: University of California, San Diego," Applied Energy, Elsevier, vol. 169(C), pages 709-720.
    21. Woo, C.K. & Zarnikau, J., 2019. "Renewable energy's vanishing premium in Texas's retail electricity pricing plans," Energy Policy, Elsevier, vol. 132(C), pages 764-770.
    22. Kang Hua Cao & Han Qi & Chi-Keung Woo & Jay Zarnikau & Raymond Li, 2024. "Efficient Frontiers for Short-term Sales of Spot and Forward Wind Energy in Texas," The Energy Journal, , vol. 45(6), pages 37-60, November.
    23. Damien, Paul & Fuentes-García, Ruth & Mena, Ramsés H. & Zarnikau, Jay, 2019. "Impacts of day-ahead versus real-time market prices on wholesale electricity demand in Texas," Energy Economics, Elsevier, vol. 81(C), pages 259-272.
    24. Spodniak, Petr & Bertsch, Valentin, 2020. "Is flexible and dispatchable generation capacity rewarded in electricity futures markets? A multinational impact analysis," Energy, Elsevier, vol. 196(C).
    25. Massimiliano Celli, 2016. "External VS. Internal Audit in the Accounting of Complex Contractual Instruments: A Survey on EU Firms," International Journal of Business and Management, Canadian Center of Science and Education, vol. 11(5), pages 1-22, April.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Chi-Keung Woo & Ira Horowitz & Jay Zarnikau & Jack Moore & Brendan Schneiderman & Tony Ho & Eric Leung, 2016. "What Moves the Ex Post Variable Profit of Natural-Gas-Fired Generation in California?," The Energy Journal, , vol. 37(3), pages 29-57, July.
    2. Woo, C.K. & Moore, J. & Schneiderman, B. & Ho, T. & Olson, A. & Alagappan, L. & Chawla, K. & Toyama, N. & Zarnikau, J., 2016. "Merit-order effects of renewable energy and price divergence in California’s day-ahead and real-time electricity markets," Energy Policy, Elsevier, vol. 92(C), pages 299-312.
    3. Woo, C.K. & Chen, Y. & Olson, A. & Moore, J. & Schlag, N. & Ong, A. & Ho, T., 2017. "Electricity price behavior and carbon trading: New evidence from California," Applied Energy, Elsevier, vol. 204(C), pages 531-543.
    4. Woo, C.K. & Shiu, A. & Liu, Y. & Luo, X. & Zarnikau, J., 2018. "Consumption effects of an electricity decarbonization policy: Hong Kong," Energy, Elsevier, vol. 144(C), pages 887-902.
    5. Zarnikau, J. & Woo, C.K. & Zhu, S. & Tsai, C.H., 2019. "Market price behavior of wholesale electricity products: Texas," Energy Policy, Elsevier, vol. 125(C), pages 418-428.
    6. Woo, C.K. & Sreedharan, P. & Hargreaves, J. & Kahrl, F. & Wang, J. & Horowitz, I., 2014. "A review of electricity product differentiation," Applied Energy, Elsevier, vol. 114(C), pages 262-272.
    7. Woo, C.K. & Zarnikau, J. & Moore, J. & Horowitz, I., 2011. "Wind generation and zonal-market price divergence: Evidence from Texas," Energy Policy, Elsevier, vol. 39(7), pages 3928-3938, July.
    8. Cao, K.H. & Qi, H.S. & Tsai, C.H. & Woo, C.K. & Zarnikau, J., 2021. "Energy trading efficiency in the US Midcontinent electricity markets," Applied Energy, Elsevier, vol. 302(C).
    9. Zarnikau, J. & Tsai, C.H. & Woo, C.K., 2020. "Determinants of the wholesale prices of energy and ancillary services in the U.S. Midcontinent electricity market," Energy, Elsevier, vol. 195(C).
    10. Sreedharan, P. & Miller, D. & Price, S. & Woo, C.K., 2012. "Avoided cost estimation and cost-effectiveness of permanent load shifting in California," Applied Energy, Elsevier, vol. 96(C), pages 115-121.
    11. Joanna Janczura, 2012. "Pricing electricity derivatives within a Markov regime-switching model," Papers 1203.5442, arXiv.org.
    12. Weron, Rafał, 2014. "Electricity price forecasting: A review of the state-of-the-art with a look into the future," International Journal of Forecasting, Elsevier, vol. 30(4), pages 1030-1081.
    13. Carlo Fezzi & Derek Bunn, 2010. "Structural Analysis of Electricity Demand and Supply Interactions," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 72(6), pages 827-856, December.
    14. Per B. Solibakke, 2022. "Step‐ahead spot price densities using daily synchronously reported prices and wind forecasts," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 41(1), pages 17-42, January.
    15. Zarnikau, J. & Zhu, S. & Woo, C.K. & Tsai, C.H., 2020. "Texas's operating reserve demand curve's generation investment incentive," Energy Policy, Elsevier, vol. 137(C).
    16. Lo Prete, Chiara & Norman, Catherine S., 2013. "Rockets and feathers in power futures markets? Evidence from the second phase of the EU ETS," Energy Economics, Elsevier, vol. 36(C), pages 312-321.
    17. Joanna Janczura, 2014. "Pricing electricity derivatives within a Markov regime-switching model: a risk premium approach," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 79(1), pages 1-30, February.
    18. Rafal Weron, 2006. "Modeling and Forecasting Electricity Loads and Prices: A Statistical Approach," HSC Books, Hugo Steinhaus Center, Wroclaw University of Science and Technology, number hsbook0601, December.
    19. Bosco, Bruno & Parisio, Lucia & Pelagatti, Matteo & Baldi, Fabio, 2007. "A Robust Multivariate Long Run Analysis of European Electricity Prices," International Energy Markets Working Papers 7438, Fondazione Eni Enrico Mattei (FEEM).
    20. Godin, Frédéric & Ibrahim, Zinatu, 2021. "An analysis of electricity congestion price patterns in North America," Energy Economics, Elsevier, vol. 102(C).

    More about this item

    Keywords

    Wind generation; Tolling agreement; Spark spread option; Investment incentive;
    All these keywords.

    JEL classification:

    • F0 - International Economics - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sae:enejou:v:33:y:2011:i:1:p:207-230. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: SAGE Publications (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.