Electricity pricing challenges in future renewables-dominant power systems

Abstract

Economy-wide decarbonization will require electric power systems to rely heavily on variable renewable energy (VRE, mainly wind and solar generation), which has near zero marginal operating costs, and energy storage. We have modeled optimized, deeply decarbonized power systems in three US regions at mid-century under a wide range of plausible cost and technology assumptions. The shadow marginal values of energy (MVEs) from these optimizations approximate the wholesale spot prices of energy in simplified hypothetical competitive energy-only wholesale markets in which revenues earned by selling energy in wholesale electricity markets should be sufficient to cover all capital and operating costs. A very robust result is that under carbon constraints, very low MVEs occur much more frequently than in today's wholesale markets, and very high prices are also more frequent than today. Revenues from a relatively small number of high MVE periods are required to fully cover VRE capital and operating costs, while storage charges and discharges in many hours. In an ideal, efficient regime, a competitive energy-only wholesale market without price caps would minimize total system costs, and retail rates equal to wholesale spot prices would fully cover those costs and induce efficient demand behavior. Real power systems depart significantly from this ideal: price caps are used frequently in wholesale markets, capacity payments from organized capacity markets or bilateral contracts are relied on to supplement energy market revenues to enable full cost recovery, and most customers face retail rates that do not reflect variations in marginal operating costs. The greater volatility of future decarbonized wholesale markets will increase the costs of such politically attractive departures from the ideal regime.