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The Future of Power Markets in a Low Marginal Cost World

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  • Bielen, David
  • Burtraw, Dallas

    (Resources for the Future)

  • Palmer, Karen

    (Resources for the Future)

  • Steinberg, Daniel

Abstract

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.

Suggested Citation

  • Bielen, David & Burtraw, Dallas & Palmer, Karen & Steinberg, Daniel, 2017. "The Future of Power Markets in a Low Marginal Cost World," RFF Working Paper Series 17-26, Resources for the Future.
    • Handle: RePEc:rff:dpaper:dp-17-26
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    File URL: https://www.rff.org/documents/1797/RFF20WP2017-26.pdf
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    References listed on IDEAS

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    2. Peter Cramton & Axel Ockenfels, 2012. "Economics and Design of Capacity Markets for the Power Sector," Papers of Peter Cramton 12cocap, University of Maryland, Department of Economics - Peter Cramton, revised 2012.
    3. David Sappington & Dennis Weisman, 2010. "Price cap regulation: what have we learned from 25 years of experience in the telecommunications industry?," Journal of Regulatory Economics, Springer, vol. 38(3), pages 227-257, December.
    4. Joskow, Paul L, 1974. "Inflation and Environmental Concern: Structural Change in the Process of Public Utility Price Regulation," Journal of Law and Economics, University of Chicago Press, vol. 17(2), pages 291-327, October.
    5. Besser, Janet Gail & Farr, John G. & Tierney, Susan F., 2002. "The Political Economy of Long-Term Generation Adequacy: Why an ICAP Mechanism is Needed as Part of Standard Market Design," The Electricity Journal, Elsevier, vol. 15(7), pages 53-62.
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