Abstract
Electricity markets are designed to provide reliable electricity at least cost to consumers. This paper describes how the best designs satisfy the twin goals of short-run efficiency-making the best use of existing resources-and long-run efficiency-promoting efficient investment in new resources. The core elements are a day-ahead market for optimal scheduling of resources and a real-time market for security-constrained economic dispatch. Resources directly offer to produce per their underlying economics and then the system operator centrally optimizes all resources to maximize social welfare. Locational marginal prices, reflecting the marginal value of energy at each time and location, are used in settlement. This spot market provides the basis for forward contracting, which enables participants to manage risk and improves bidding incentives in the spot market. There are important differences in electricity markets around the world, reflecting different economic and political settings. Electricity markets are undergoing a transformation as the resource mix transitions from fossil fuels to renewables. The main renewables, wind and solar, are intermittent, have zero marginal cost, and lack inertia. These challenges can be met with battery storage and improved demand response. However, good governance is needed to assure the market rules adapt to meet new challenges.
Highlights
Today’s restructured electricity markets illustrate the importance and power of effective market design
My purpose here is to present the basic features of the electricity market, explain how the market works to address key objectives, how it has evolved over time, and whether it is suited to handle the large changes that will take place over the decades
The Independent System Operator (ISO) is guided by a mission, which in Texas is: ‘To serve the public by ensuring a reliable grid, efficient electricity markets, open access and retail choice.’
Summary
Today’s restructured electricity markets illustrate the importance and power of effective market design. Despite some bumps along the way, the markets have largely succeeded in the goal of providing reliable electricity at least cost to consumers. My purpose here is to present the basic features of the electricity market, explain how the market works to address key objectives, how it has evolved over time, and whether it is suited to handle the large changes that will take place over the decades. Efforts to address climate change will shift generation from fossil fuels to wind, solar, nuclear, and other non-emitting resources. The key is good governance, forward planning, and a strong focus on basic market principles to achieve market objectives
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