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Does locational marginal pricing impact generation investment location decisions? An analysis of Texas’s wholesale electricity market

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  • David P. Brown

    (University of Alberta)

  • Jay Zarnikau

    (University of Texas at Austin)

  • Chi-Keung Woo

    (Education University of Hong Kong)

Abstract

Using data from Texas’s wholesale electricity market, we investigate the relationship between nodal prices and investment location decisions of utility-scale generation. We find some evidence that new investment arises in areas with recently elevated nodal prices. However, we find no evidence that new generation resources receive a nodal price premium post-entry as projected by the expectation of higher nodal prices. Further, a logit regression analysis suggests that the probability of natural-gas-fired generation investments tends to increase with expected nodal prices in peak hours. However, the estimated relationship is statistically and economically weak and sensitive to model specification. These findings suggest other factors are more important drivers than nodal prices of location decisions for utility-scale generation investments in Texas.

Suggested Citation

  • David P. Brown & Jay Zarnikau & Chi-Keung Woo, 2020. "Does locational marginal pricing impact generation investment location decisions? An analysis of Texas’s wholesale electricity market," Journal of Regulatory Economics, Springer, vol. 58(2), pages 99-140, December.
    • Handle: RePEc:kap:regeco:v:58:y:2020:i:2:d:10.1007_s11149-020-09413-0
    DOI: 10.1007/s11149-020-09413-0
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    Citations

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    Cited by:

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    5. Paul Simshauser & Farhad Billimoria & Craig Rogers, 2021. "Optimising VRE plant capacity in Renewable Energy Zones," Working Papers EPRG2121, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
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    More about this item

    Keywords

    Electricity; Regulation; Entry; Locational marginal pricing;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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