A major contribution from the economics of regulatory practice in electricity markets is the usefulness of marginal cost pricing. In recent years, expanded supply of low cost natural gas, increased energy efficiency, growing market penetration of renewable electricity sources, and substantial reserve margins have contributed to low prices reflecting low marginal costs in wholesale energy and capacity markets. These low prices have placed some existing generation assets at financial risk and altered incentives for new investment. While low prices should indicate ample generation capacity, some observers fear they fail to represent the long run scarcity value of electricity and thereby undermine resource adequacy. This paper explores four paradigms for the future of the electricity sector in a low marginal cost world, including traditional cost of service, energy-only power markets, energy plus capacity payment mechanisms, and new relationships between providers and consumers on an energy platform. These paradigms are evaluated for their ability to achieve efficient long-run outcomes in the industry and other criteria.
Darius Gaskins Senior Fellow
Senior Fellow and Director, Future of Power Initiative
Workshops & Seminars — Nov 28, 2018
Market Design for the Clean Energy Transition
Co-hosted with World Resources Institute.
The Future of Power Markets in a Low Marginal Cost World (Workshop)
On September 14, 2017, academics, policy makers, representatives of Independent System Operators/Regional Transmission Organizations and other stakeholders engaged in a discussion of the future of electricity markets over the next two decades, with an emphasis on the potential for high penetrations of zero and low marginal cost generation, and various options for organizing wholesale electricity transactions in the face of rapid technological change.
PJM’s Opposing Efforts to Accommodate and Exclude State Clean Energy Policies in Wholesale Markets