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The Economics of Electricity Reliability

Author

Listed:
  • Severin Borenstein
  • James Bushnell
  • Erin Mansur

Abstract

The physics of an electrical grid requires that the supply injected into the grid is always in balance with the quantity consumed. If that balance is not maintained, cascading outages are likely to disrupt supply to all consumers on the grid. In the past, vertically integrated monopoly utilities have ensured that supply is adequate to meet demand and maintain grid stability, but with deregulation of generation, assuring adequate supply has become much more complex. The unique characteristics of electricity distribution means that there are immense potential externalities among market participants from supply shortfalls. In this paper, we discuss the institutions that US electricity markets have developed to avoid such destabilizing supply shortfalls when there are multiple generators and retailers in the market. Though many of the markets rely on standardized requirements for supplier reserves, we conclude that recent technological progress may steer future evolution towards a system that relies to a greater extent on economic incentives.

Suggested Citation

  • Severin Borenstein & James Bushnell & Erin Mansur, 2023. "The Economics of Electricity Reliability," Journal of Economic Perspectives, American Economic Association, vol. 37(4), pages 181-206, Fall.
    • Handle: RePEc:aea:jecper:v:37:y:2023:i:4:p:181-206
    DOI: 10.1257/jep.37.4.181
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    Citations

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    Cited by:

    1. Davi-Arderius, Daniel & Jamasb, Tooraj, 2026. "Measuring a paradox: Zero-negative electricity prices," Utilities Policy, Elsevier, vol. 98(C).
    2. Azam, Mehtabul, 2026. "The Enclave Penalty: Tribes, Caste, and Electricity Reliability in India," IZA Discussion Papers 18493, IZA Network @ LISER.
    3. Shi, Tie & Chen, Hanyi & Liu, Yanzhen, 2025. "Extreme temperatures and residential electricity reliability in China," Utilities Policy, Elsevier, vol. 96(C).
    4. Francesco Decarolis, 2026. "Reforming EU Electricy Market Design: PPAS, CFDS, and Long-Term Signals for a Renewable-Dominates System," BAFFI CAREFIN Working Papers 26264, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    5. Zhile Jiang & Xinhao Nie & Stratis Skoulakis, 2026. "The Welfare Gap of Strategic Storage: Universal Bounds and Price Non-Linearity," Papers 2602.19660, arXiv.org.
    6. Kahn-Lang, Jenya & Robertson, Molly, 2026. "Resource Inadequacy: Why a Crucial Component of Keeping the Lights on Is Getting Harder," RFF Issue Briefs 26-01, Resources for the Future.
    7. Zuo, Ke Xin & Macey, Joshua C. & Mays, Jacob, 2025. "Revisiting capacity market fundamentals," Energy Economics, Elsevier, vol. 150(C).
    8. Danielian, Armen, 2025. "Regulating electricity spot markets during extreme events: The 2021 Texas case," Utilities Policy, Elsevier, vol. 93(C).
    9. Mario Liebensteiner & Johannes Paha, 2026. "Renewable Investment and Electricity Rationing: Evidence from South Africa," CESifo Working Paper Series 12540, CESifo.
    10. Shi, Tie & Chen, Hanyi & Xu, Junbing & Wang, Xuebin, 2025. "The effect of temperatures on household electricity consumption in northern China: Evidence from smart meters," Utilities Policy, Elsevier, vol. 96(C).
    11. Cheng, Wei & Ahmad, Hassaan & Gao, Lin & Xing, Ji & Nie, Zelin & Chen, Xuefeng & Xu, Zhao & Zhang, Rongyong, 2025. "Diagnostics and Prognostics in Power Plants: A systematic review," Reliability Engineering and System Safety, Elsevier, vol. 255(C).

    More about this item

    JEL classification:

    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • L98 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Government Policy
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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