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What Moves the Ex Post Variable Profit of Natural-Gas-Fired Generation in California?

We use a large California database of over 32,000 hourly observations in the 45month period of April 2010 through December 2013 to document the ex post variable profit effects of multiple fundamental drivers on natural-gas-fired electricity generation. These drivers are the natural-gas price, system loads, nuclear capacities available, hydro conditions, and renewable generation. We find that profits are reduced by increases in generation from nuclear plants and wind farms, and are increased by increases in the natural-gas price and loads. Solar generation has a statistically insignificant effect, although this will likely change as solar energy increases its generation share in California's electricity market. Our findings support California's adopted resource adequacy program under which the state's load-serving entities may sign long-term bilateral contracts with generation developers to provide sufficient revenues to enable construction of new natural-gas-fired generation plants.

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Energy Specializations: Natural Gas – Markets and Prices; Electricity – Markets and Prices ; Renewables – Wind ; Energy and the Environment – Policy and Regulation; Natural Gas – Policy and Regulation; Electricity – Generation Technologies

JEL Codes:
L13 - Oligopoly and Other Imperfect Markets
D42 - Market Structure, Pricing, and Design: Monopoly
Q51 - Valuation of Environmental Effects
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General
Q2 -

Keywords: Revenue adequacy, Profit effect, Natural-gas-fired generation, Resource adequacy

DOI: 10.5547/01956574.37.3.cwoo

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Published in Volume 37, Number 3 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.