Canceled: A New Reliability Incentive for Energy-Only Electricity Markets

TL;DR

This paper evaluates a reliability price incentive in Texas energy markets, analyzing its effects on market prices, capacity entry, and trader behavior, and finds that the incentive does not promote new capacity or alter market dynamics significantly.

Contribution

It provides a comprehensive assessment of a novel reliability incentive's impact on market equilibrium, capacity entry, and trading behavior using theoretical and empirical methods.

Findings

The incentive does not significantly increase market capacity.

Market prices are unaffected by the incentive.

Traders do not respond directly to the incentive signals.

Abstract

This paper considers the reliability problem in energy-only markets. Following widespread blackouts in 2011, Texas introduced a reliability price incentive to attract two GW of net additional natural gas-generating capacity. The incentive is unusual because energy buyers pay the incentive directly to producers in a real-time spot market. The program has created $13 billion in direct payments to generators annually since 2015 and is now being implemented or considered in several major energy markets in the US and abroad. We assess the incentive's impact on the Texas market from three perspectives: First, we derive the incentive's equilibrium effect on the electricity price in a monopolistic market from first principles using a standard partial equilibrium economic model. We then empirically test whether the incentive encouraged net entry into the market or the generating applicant pool, controlling for market and climatic conditions using monthly capacity data. Finally, we look for direct evidence of an incentive response among active traders using real-time market trading data. The three approaches suggest buyers and producers cancel out the incentive, and the price-only program does not encourage new generation capacity to enter the market.