Competitive wholesale electricity markets are at a turning point. Current market rules and practices were established to manage a system built around large central plant stations generating electricity to meet inflexible demand. Prices and market revenues are tied to generators’ production costs, which have historically been largely dependent on the prices of fuels burned in those plants.
Today’s resource mix is changing. Carbon free resources with near-zero production costs such as wind, solar, and energy storage are replacing fuel-burning power plants due to falling prices and government policy. This trend is certain to continue.
These resources differ in several important ways from the fuel-burning power plants around which wholesale electricity markets were originally designed. First, they have near-zero production costs as they don’t require any fuel. Second, these new resources are smaller, and can therefore be deployed more rapidly and in smaller increments. Third, they have very different production characteristics than thermal resources, with output tied to the availability of their energy resource, i.e. wind or sunshine. These differences have significant implications for how markets run and how prices and revenue can support a least-cost electricity mix.
The evolving mix of energy resources on the grid and decarbonization trend leads to the following question: “What wholesale market design would provide the best framework for reliably integrating the new, clean resources needed to decarbonize the power system at least cost?”