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

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.Keywords: Wind generation, Tolling agreement, Spark spread option, Investment incentive

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Energy Specializations: Natural Gas – Markets and Prices; Natural Gas – Policy and Regulation; Electricity – Generation Technologies; Electricity – Policy and Regulation

JEL Codes: Q41: Energy: Demand and Supply; Prices, Q40: Energy: General, Q54: Climate; Natural Disasters and Their Management; Global Warming, Q35: Hydrocarbon Resources, Q53: Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling, Q38: Nonrenewable Resources and Conservation: Government Policy

Keywords: Wind generation, Tolling agreement, Spark spread option, Investment incentive

DOI: 10.5547/ISSN0195-6574-EJ-Vol33-No1-8

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Published in Volume 33, Number 1 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.