Electricity Market Price Volatility: The Importance of Ramping Costs

Although electricity market price behavior generally has been well studied in the last decade, the literature is sparse when discussing the importance of generator ramping costs to price volatility. This paper contributes to the literature by first formalizing the intuitive link between ramping costs and price volatility in a multi-period competitive equilibrium. The fundamental result of the model shows how price volatility rises with ramping costs. This notion is tested empirically using a pooled event study regression, a two-stage least squares (2SLS) specification, and a generalized autoregressive conditional heteroskedasticity (GARCH) model. The econometric results all confirm that price volatility is significantly decreased by additional natural gas capacity, which has comparatively low ramping costs. This marks the first rigorous study to quantify the pecuniary externalities within the New England market’s generating profile, showing over a million dollars worth of price stability provided per year by each new natural gas generator. A simulation also explores how this value changes over time, noting that value of price stability from natural gas generators will increase with the proportion of non-dispatchable renewable generators. PhD Student, Department of Agricultural and Resource Economics, University of Maryland, College Park. Send comments to [email protected]. I would like to thank my advisor, Sébastien Houde, for his feedback and encouragement on this research project. I am also thankful for helpful discussion and comments from many others in our department, including Rob Williams, Anna Alberini, and Ian Page.