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Missing incentives for flexibility in wholesale electricity markets

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  • Mays, Jacob

Abstract

In most liberalized electricity markets, flaws in short-term price formation have led to a “missing money” problem wherein average energy prices are too low to support an efficient level of capacity. Recent growth of wind and solar generation has exposed another category of flaws related to intertemporal constraints, such that energy prices are not volatile enough to support an efficient level of flexibility. In theory, electricity markets convey the value of flexibility through time-varying prices, encouraging market participants to invest in resources able to match production and consumption profiles to grid needs. Real-world market clearing procedures, however, make several simplifications that suppress volatility relative to the theoretical ideal. This paper describes five mechanisms by which current wholesale electricity market price formation may fail to provide full-strength incentives for flexible resources. Instead of restoring price volatility, market designers may choose to define flexibility products that act as a proxy for full-strength prices. However, these products cannot replicate theoretically ideal incentives precisely, with potentially important consequences for small-scale and distributed resources. The analysis could help guide ongoing efforts to ensure that systems have the capability to respond to growing variability and uncertainty in an efficient way.

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  • Mays, Jacob, 2021. "Missing incentives for flexibility in wholesale electricity markets," Energy Policy, Elsevier, vol. 149(C).
    • Handle: RePEc:eee:enepol:v:149:y:2021:i:c:s0301421520307217
    DOI: 10.1016/j.enpol.2020.112010
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    2. Macedo, Daniela Pereira & Marques, António Cardoso & Damette, Olivier, 2022. "The role of electricity flows and renewable electricity production in the behaviour of electricity prices in Spain," Economic Analysis and Policy, Elsevier, vol. 76(C), pages 885-900.
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    4. Jun Dong & Dongran Liu & Xihao Dou & Bo Li & Shiyao Lv & Yuzheng Jiang & Tongtao Ma, 2021. "Key Issues and Technical Applications in the Study of Power Markets as the System Adapts to the New Power System in China," Sustainability, MDPI, vol. 13(23), pages 1-29, December.
    5. Markus Fleschutz & Markus Bohlayer & Marco Braun & Michael D. Murphy, 2023. "From prosumer to flexumer: Case study on the value of flexibility in decarbonizing the multi-energy system of a manufacturing company," Papers 2301.07997, arXiv.org.
    6. Prakash, Abhijith & Ashby, Rohan & Bruce, Anna & MacGill, Iain, 2023. "Quantifying reserve capabilities for designing flexible electricity markets: An Australian case study with increasing penetrations of renewables," Energy Policy, Elsevier, vol. 177(C).
    7. Máximo A. Domínguez-Garabitos & Víctor S. Ocaña-Guevara & Félix Santos-García & Adriana Arango-Manrique & Miguel Aybar-Mejía, 2022. "A Methodological Proposal for Implementing Demand-Shifting Strategies in the Wholesale Electricity Market," Energies, MDPI, vol. 15(4), pages 1-28, February.
    8. Hohl, Cody & Lo Prete, Chiara & Radhakrishnan, Ashish & Webster, Mort, 2023. "Intraday markets, wind integration and uplift payments in a regional U.S. power system," Energy Policy, Elsevier, vol. 175(C).

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