Challenges for Wholesale Electricity Markets with Intermittent Renewable Generation at Scale: the US Experience

Date Published: January 2019

Authors: Paul Joskow

The growth of intermittent renewable generation is currently supported by the dispatchability of the existing fossil generation fleet. However, as that fleet is retired and mandates for lower-carbon generation portfolios build in ambition, the incentive structures of wholesale energy markets may not attract suitable resources to replace those grid services. Dr. Joskow summarizes the existing market structures, both in theory and practice, and uses examples from the California ISO to demonstrate the challenges of integrating significant variable generation. He does not believe that efficient long-term operations through market mechanisms can be achieved if energy-only markets have price caps below the value of lost load, without complementary resource adequacy systems. Reflecting wholesale prices in retail rates without a price cap would create a scarcity price signal to demand, but he notes it would likely not be popular and market power issues could re-emerge. However, he believes that potential consumer responsiveness to price signals is underestimated. Dr. Joskow proposes that scarcity pricing would also support energy storage built on the business model of arbitrage (in addition to revenue streams from other grid services). He suggests a path to greater deployment of energy storage is in the open planning process required by FERC Order 1000, as a “grid investment deferral alternative.” He concludes that “The continued reliance on subsidies, resource mandates, mandated long-term contracts, etc. for intermittent generation is simply incompatible with relying on markets for the rest of the supply portfolio,” and argues for a separate market for long-term contracts to procure the storage and generation will be needed to manage intermittency.

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