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Does Locational Marginal Pricing Impact Generation Investment Location Decisions? An Analysis of Texas's Wholesale Electricity Market

Author

Listed:
  • David P. Brown

    (University of Alberta, Department of Economics)

  • 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 if there is a 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, we employ a regression analysis to test the relationship between expected nodal prices and the probability of entry at a given node. While this analysis finds a positive relationship between expected nodal prices and investment for natural-gas-fueled peaking assets, this relationship is sensitive to model specification. Our findings suggest that factors other than nodal prices are more likely drivers of utility scale generation capacity investment location decisions 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," Working Papers 2020-01, University of Alberta, Department of Economics.
    • Handle: RePEc:ris:albaec:2020_001
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    References listed on IDEAS

    as
    1. Zarnikau, J. & Woo, C.K. & Zhu, S. & Tsai, C.H., 2019. "Market price behavior of wholesale electricity products: Texas," Energy Policy, Elsevier, vol. 125(C), pages 418-428.
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    9. repec:aen:eeepjl:2_2_a01 is not listed on IDEAS
    10. repec:aen:journl:ej37-3-woo is not listed on IDEAS
    11. Woo, C.K. & Chen, Y. & Olson, A. & Moore, J. & Schlag, N. & Ong, A. & Ho, T., 2017. "Electricity price behavior and carbon trading: New evidence from California," Applied Energy, Elsevier, vol. 204(C), pages 531-543.
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    Citations

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    Cited by:

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    2. Eicke, Anselm & Schittekatte, Tim, 2022. "Fighting the wrong battle? A critical assessment of arguments against nodal electricity prices in the European debate," Energy Policy, Elsevier, vol. 170(C).
    3. Cao, K.H. & Qi, H.S. & Li, R. & Woo, C.K. & Tishler, A. & Zarnikau, J., 2023. "An experiment in own-price elasticity estimation for non-residential electricity demand in the U.S," Utilities Policy, Elsevier, vol. 81(C).
    4. Lundin, Erik, 2022. "Geographic price granularity and investments in wind power: Evidence from a Swedish electricity market splitting reform," Energy Economics, Elsevier, vol. 113(C).
    5. Milstein, I. & Tishler, A. & Woo, C.K., 2024. "The effect of PV generation's hourly variations on Israel's solar investment," Energy Economics, Elsevier, vol. 136(C).
    6. Simshauser, Paul, 2024. "On static vs. dynamic line ratings in renewable energy zones," Energy Economics, Elsevier, vol. 129(C).
    7. Michael G. Pollitt, 2023. "Locational Marginal Prices (LMPs) for electricity in Europe? The untold story," Working Papers EPRG2318, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    8. Cao, K.H. & Qi, H.S. & Tsai, C.H. & Woo, C.K. & Zarnikau, J., 2021. "Energy trading efficiency in the US Midcontinent electricity markets," Applied Energy, Elsevier, vol. 302(C).
    9. Thomaßen, Georg & Fuhrmanek, Andreas, 2025. "Where to build renewables in Europe? The benefits of locational auction design," Energy Economics, Elsevier, vol. 147(C).
    10. Przemysław Kaszyński & Aleksandra Komorowska & Jacek Kamiński, 2023. "Revisiting Market Power in the Polish Power System," Energies, MDPI, vol. 16(13), pages 1-23, June.

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    Keywords

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    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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