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The Trouble With Electricity Markets: Understanding California's Restructuring Disaster

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  • Severin Borenstein

Abstract

In June 2000, after two years of fairly smooth operation, California's deregulated wholesale electricity market began producing extremely high prices and threats of supply shortages. The upheaval demonstrated dramatically why most current electricity markets are extremely volatile: demand is difficult to forecast and exhibits virtually no price responsiveness, while supply faces strict production constraints and prohibitive storage costs. This structure leads to periods of surplus and of shortage, the latter exacerbated by sellers' ability to exercise market power. Electricity markets can function much more smoothly, however, if they are designed to support price-responsive demand and long-term wholesale contracts for electricity.

Suggested Citation

  • Severin Borenstein, 2002. "The Trouble With Electricity Markets: Understanding California's Restructuring Disaster," Journal of Economic Perspectives, American Economic Association, vol. 16(1), pages 191-211, Winter.
    • Handle: RePEc:aea:jecper:v:16:y:2002:i:1:p:191-211
    Note: DOI: 10.1257/0895330027175
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    References listed on IDEAS

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    1. Borenstein, Severin, 2000. "Understanding Competitive Pricing and Market Power in Wholesale Electricity Markets," The Electricity Journal, Elsevier, vol. 13(6), pages 49-57, July.
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