Wholesale Electricity Market Design for Decarbonization: Research Opportunities

Abstract

I review several prominent wholesale electricity market design challenges presently facing policy makers, explain their importance with respect to decarbonization of the energy system, and identify a number of areas where economic research can inform policy to facilitate decarbonization. I draw from the experience of the deregulated electricity markets in the U.S. and a large economics literature to illustrate these challenges. Market designs that incentivize price-responsive demand have the potential to improve efficiency and help accommodate intermittent renewable generation resources. Utility-scale storage technologies promise to dramatically change how supply and demand are balanced in the short run. Designs promoting efficient long-run investment, such as capacity markets and scarcity pricing, must contemplate technological complementarities and other generator attributes if they are to achieve reliability standards and decarbonization at lowest cost. Long-run contracts mitigate risk and market power, and are instrumental in deploying renewable energy, yet their role in future market designs is not clearly defined. Internalizing the social cost of carbon is crucial to both short- and long-run market design objectives.