Measuring the Benefits of Greater Spatial Granularity in Short-Term Pricing in Wholesale Electricity Markets

This paper quantifies the economic benefits associated with the introduction of greater spatial granularity in short-term pricing in the California wholesale electricity market. On April 1, 2009, California switched to a nodalpricing market with an integrated day-ahead forward market and real-time imbalance market from its original zonal market design with bilateral day-ahead scheduling, a real-time imbalance market, and an intrazonal congestion management process. Semiparametric conditional mean functions that control for observable differences in hourly system conditions are estimated for three hourly market performance measures from January 1, 2008 to June 30, 2010 to quantify the change in the conditional means of these three measures before versus after the implementation of the nodal-pricing market. The market performance measures focus on quantifying the economic benefits associated with the operation of the 258 natural gasfired generation units located in the California Independent System Operator (ISO) control area. All but a very small fraction of the fossil fuel–fired generation capacity in California consumes natural gas. Approximately 60 percent of the installed generation capacity in the California ISO control area is natural gas–fired. The remaining capacity is nuclear, hydroelectric, wind, or solar powered. These generation facilities have substantially lower variable costs of production than natural gas units and can therefore be expected to operate if they are available under either market design. The hourly market performance measures are: (i) total amount of energy consumed by natural gas–fired generation units; (ii) total number of starts by natural