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Title: Impact of Market Behavior, Fleet Composition, and Ancillary Services on Revenue Sufficiency

Revenue insufficiency, or the missing money problem, occurs when the revenues that generators earn from the market are not sufficient to cover both fixed and variable costs to remain in the market and/or justify investments in new capacity, which may be needed for reliability. The near-zero marginal cost of variable renewable generators further exacerbates these revenue challenges. Estimating the extent of the missing money problem in current electricity markets is an important, nontrivial task that requires representing both how the power system operates and how market participants behave. This paper explores the missing money problem using a production cost model that represented a simplified version of the Electric Reliability Council of Texas (ERCOT) energy-only market for the years 2012-2014. We evaluate how various market structures -- including market behavior, ancillary services, and changing fleet compositions -- affect net revenues in this ERCOT-like system. In most production cost modeling exercises, resources are assumed to offer their marginal capabilities at marginal costs. Although this assumption is reasonable for feasibility studies and long-term planning, it does not adequately consider the market behaviors that impact revenue sufficiency. In this work, we simulate a limited set of market participant strategic bidding behaviors by means ofmore » different sets of markups; these markups are applied to the true production costs of all gas generators, which are the most prominent generators in ERCOT. Results show that markups can help generators increase their net revenues overall, although net revenues may increase or decrease depending on the technology and the year under study. Results also confirm that conventional, variable-cost-based production cost simulations do not capture prices accurately, and this particular feature calls for proxies for strategic behaviors (e.g., markups) and more accurate representations of how electricity markets work. The analysis also shows that generators face revenue sufficiency challenges in this ERCOT-like energy-only market model; net revenues provided by the market in all base markup cases and sensitivity scenarios (except when a large fraction of the existing coal fleet is retired) are not sufficient to justify investments in new capacity for thermal and nuclear power units. Overall, the work described in this paper points to the need for improved behavioral models of electricity markets to more accurately study current and potential market design issues that could arise in systems with high penetrations of renewable generation.« less
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  1. National Renewable Energy Lab. (NREL), Golden, CO (United States)
Publication Date:
OSTI Identifier:
Report Number(s):
DOE Contract Number:
Resource Type:
Technical Report
Research Org:
National Renewable Energy Lab. (NREL), Golden, CO (United States)
Sponsoring Org:
USDOE Office of Energy Efficiency and Renewable Energy (EERE), Wind and Water Technologies Office (EE-4W)
Country of Publication:
United States
24 POWER TRANSMISSION AND DISTRIBUTION; 29 ENERGY PLANNING, POLICY, AND ECONOMY revenue insufficiency; missing money problem; production cost modeling; renewables generation; capacity; reliability