Three essays on the incentive for generation investment in deregulated electricity markets

  • Yun Liu

    Student thesis: Doctoral Thesis


    This thesis is a collection of three essays discussing the incentive for generation investment in deregulated electricity markets in Texas and California. Essay one: Ex post payoffs of a tolling agreement for natural-gas-fired generation in Texas. To explore the problem of insufficient investment incentive for natural-gas-fired generation in Electricity Reliability Council of Texas (ERCOT), I use a large sample of over 134,000 15-minute observations in the 46-month period of 01/01/2011 - 10/31/2014 to estimate the effects of several fundamental drivers on the ex post payoffs of three hypothetical tolling agreements by heat rate. Our assumed heat rates reflect those of a new combined cycle gas turbine (CCGT), a new combustion turbine (CT) and an old CT. The fundamental drivers are postulated to be the natural-gas price, regional loads, nuclear generation, and wind generation. We find rising natural-gas price and non-West regional loads tend to increase the agreements' ex post payoffs. These payoff increases, however, were reduced by rising West regional load, nuclear generation and wind generation. Finally, we find a substantial payoff decline due to large-scale wind generation development in Texas, lending support to the suggestion of ERCOT's transition from an energy-only market to an energy-and-capacity market. Essay two: Wind generation's effect on the ex post variable profit of compressed air energy storage: Evidence from Texas. We use 1401 daily observations in the 46-month period of 01/01/2011 - 10/31/2014 to estimate wind generation's effect on the daily per MWH arbitrage profits of compressed air energy storage (CAES) in the four regions of Houston, North, South, and West in the Electricity Reliability Council of Texas (ERCOT). We find an increase in wind generation's MWH output in the discharge hours tends to reduce a CAES system's profits. The same MWH increase in the charge hours, however, tends to increase profits. Hence, a wind generation capacity expansion that increases wind MWH in both discharge and charge hours has offsetting profit effects, implying that a CAES unit's profitability is unlikely affected by wind generation development. Sharply contrasting the "gone with the wind" profitability problem faced by natural-gas-fired generation, our findings lend support to the financial attractiveness of CAES, whose development is useful for integrating a rising share of wind generation capacity into an electric grid. Essay three: Renewable generation's impact on pumped hydro storage's profitability in California. We use a sample of 860 daily observations over the 28-month period of 12/12/2012 - 04/30/2015 to estimate the effect of renewable generation development on pumped hydro storage's (PHS's) profitability in California. We find that rising renewable generation does not significantly (a = 0.01) diminish a PHS system's daily operating profits from energy sales at the California Independent System Operator's (CAISO's) day-head and real-time market prices, chiefly because renewable generation's merit-order effect on the market prices cuts the system's output revenue in a discharge period and input cost in a charge period. The system, however, faces severely inadequate investment incentive because its annual operating profit can hardly pay for its annual fixed cost. Hence, California should continue its adopted procurement process for long-term contracts with adequate fixed cost recovery, so as to promote PHS to reliably integrate increasing amount of renewable generation into the state's electric grid.

    Date of Award29 Dec 2016
    Original languageEnglish
    SupervisorMonique WAN (Supervisor)

    User-Defined Keywords

    • California.
    • Electric industries
    • Texas.

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