Panel Paper: Risky Business: Marginal Switching and Price Volatility in Pjm

Saturday, November 10, 2018
Taylor - Mezz Level (Marriott Wardman Park)

*Names in bold indicate Presenter

Alessio Saretto, University of Texas, Dallas, Anastasia Shcherbakova, Texas A&M University and Jeremy Lin, DNV GL

Does the use of natural gas in power generation increase price volatility in electricity markets? As the share of natural gas-based generation has grown around the U.S., some power markets began experiencing larger swings in wholesale electricity prices, especially during extreme cold spells in winter. An increase in wholesale price volatility would negatively affect utilities and end-users by exposing them to greater price risk. Understanding the effect of natural gas generation on price volatility is therefore important in evaluating the full costs and benefits of gas integration. In this study, we use emergency outages of coal generators as a quasi-natural experiment to isolate the effect of natural gas generation on wholesale real-time electricity prices. We base our analysis on PJM data from 2014 to 2016---a time period during which installed natural gas capacity in PJM increased by more than 20 percent, surpassing coal capacity. Accounting for exogenous variation in demand for gas generation, induced by an outage to a coal power plant, we do not find that wholesale prices are higher or more volatile when natural gas is on the margin more often.