Working Paper: NBER ID: w28027
Authors: Jesse F. Buchsbaum; Catherine Hausman; Johanna L. Mathieu; Jing Peng
Abstract: In electricity markets, generators are rewarded both for providing energy and for enabling grid reliability. The two functions are compensated with two separate payments: energy market payments and ancillary services market payments. We provide evidence of changes in the generation mix in the energy market that are driven by exogenous changes in an ancillary services market. We provide a theoretical framework and quasi-experimental evidence for understanding the mechanism, showing that it results from the multi-product nature of power plants combined with discontinuities in costs. Although research in economics typically focuses solely on the energy market, our results suggest that spillovers between markets are important as well. Furthermore, policy changes relating to grid operations, grid reliability, or climate change could have unintended effects.
Keywords: ancillary services; energy markets; frequency regulation; wholesale electricity markets; spillover effects
JEL Codes: L21; L94; L98; Q42; Q48; Q53; Q58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| exogenous policy changes in the ancillary services market (D47) | significant changes in the generation mix within the energy market (L94) |
| increase in the frequency regulation requirement by 100 MW (L97) | additional 360 MWh from combined cycle plants (L94) |
| increase in the frequency regulation requirement by 100 MW (L97) | decrease in generation from boiler units (L94) |
| increase in the frequency regulation requirement by 100 MW (L97) | increase in natural gas generation (Q42) |
| increase in the frequency regulation requirement by 100 MW (L97) | decrease in coal generation (L94) |
| increase in the frequency regulation requirement by 100 MW (L97) | reduction of CO2 emissions by approximately 240 metric tons per hour (L94) |
| changes in frequency regulation (L51) | changes in energy generation outputs (Q42) |
| changes in frequency regulation (L51) | changes in emissions (Q52) |