Coordinating markets for reliability: Resource adequacy as a public good

Abstract

In parts of the United States where competitive wholesale electricity markets support prior state decisions to embrace retail choice, market-based reliability planning ensures the lights stay on. The assumption that a spot price alone would incentivize both efficient short-term market operations and drive long-term investment decisions was key to economic arguments for restructuring. However, separate capacity markets are needed to ensure that generation resources are available to meet a peak load plus a defined reserve margin, since a spot price alone is insufficient to enable long-term investment decisions. The debates over the future of markets for resource adequacy in wholesale power markets continue to rely on the idea that a market price alone can enable the energy transition. This is especially true in arguments that focus only on adding a price on carbon. At the heart of these assumptions, but largely unrecognized, is the idea that generation resource adequacy is a private good. Transitioning the electricity sector is critical to meeting economy-wide decarbonization targets. Recognizing the limits of prices alone to ensure the public good aspects of electric system reliability is key.