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Natural Gas Contract Decisions for Electric Power

Author

Listed:
  • Matthew Doyle

    (Division of Economics and Business, Colorado School of Mines)

  • Ian Lange

    (Division of Economics and Business, Colorado School of Mines)

Abstract

Natural gas power plants can further specify their procurement contracts with pipeline distributors using a firm contract option that guarantees delivery at an additional cost. Using transaction level data from 2008-2012 we empirically test what characteristics lead to use of firm contracts and how the premium for firm contracts changes with these characteristics. Using variation in power plants technology type (combined vs. simple cycle) and electricity market structure (restructured vs. regulated), we generally find support for transaction cost theory in the data. Smaller plants, plants located in states with more variance in electricity demand, and plants in states with more inflow pipeline capacity are statistically less likely to use a firm contract. Firm contracts are on average 2.5% (14 cents per Mcf) more expensive and this premium increases as the weather is colder and the state a plant is located in has less inflow capacity.

Suggested Citation

  • Matthew Doyle & Ian Lange, 2016. "Natural Gas Contract Decisions for Electric Power," Working Papers 2016-05, Colorado School of Mines, Division of Economics and Business.
    • Handle: RePEc:mns:wpaper:wp201605
    as

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    File URL: http://econbus-papers.mines.edu/working-papers/wp201605.pdf
    File Function: First version, 2016
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Natural Gas; Procurement Contracts; Pipelines; Electricity;
    All these keywords.

    JEL classification:

    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • L95 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Gas Utilities; Pipelines; Water Utilities
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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