Operational Constraints and the Merit Order Effect in ERCOT

Using 5-minute locational marginal prices for approximately 16,500 locations in ERCOT over a 152-day period in the summer and fall of 2023, we find strong evidence of a merit order effect from increased wind and solar output. We also find that increased wind and solar output can affect the component of locational marginal prices arising from transmission constraints. Backing out thermal generation to accommodate increased solar and especially wind output made transmission constraints more likely to bind and, especially in peak periods, exacerbated the most severe transmission constraints. Growth in non-dispatchable capacity coupled with roughly constant dispatchable capacity thus has exacerbated operational problems arising from rapid load growth. At least one transmission constraint was binding for 78 percent of the periods in our sample. Transmission is most stressed during peak loads and least stressed under intermediate loads. Increased thermal generation generally alleviated transmission constraints, as did increased physical response capability. JEL Classification : L94, Electric Utilities; D22, Firm Behavior: Empirical Analysis; Q41, Energy: Demand and Supply; Prices