Electric Power Markets
Lecture 1
Intro to electric power markets
Pre-class
- Watch “How does the power grid work?”
- Read Griffin and Puller’s “Primer on Electricity and the Economics of Deregulation”
Post-class
- None
Key points
- How we generate electricity
- Technologies have different characteristics (size, dispatchability, cost, etc)
- Electricity is an undifferentiated commodity. Regardless of how it’s made, utility from consumption is the same.
- What’s special about electricity?
- Demand and supply have to balance exactly at every point in time and space
- It’s not economical to store electricity (although this is slowly changing)
- Goals for power markets
- Keep the lights on
- At the lowest social cost
Additional material
- Many of the figures in the slides are from the EIA’s Annual Energy Outlook. Worth scrolling through the presentation slides to see policy scenarios.
- FERC’s Energy Primer has a great overview of electric power markets in the US (Chapter 4)
Lecture 2
Start electricity market game
Slides (same as lecture 1)
Pre-class
- Watch this short video on California’s ISO (the market we’ll be looking at in the game).
- Watch this short video lecture on how a uniform price electricity auction works.
- Read the Energy Market Game About page and player tutorial.
Post-class
- Complete this quiz from last year. You can skip problem 6. Submit answers to canvas.
- Group Deliverable 1 due at start of next class. See assignment for details.
Key points
- How deregulated electricity markets work
- Plants bid in willingness to supply. Price received is the bid of the marginal producer each period.
- Plants bid in willingness to supply. Price received is the bid of the marginal producer each period.
- Start Energy Market Game
Lecture 3
Market power in electricity markets + Game checkin
Pre-Class
Post-Class
In class we reviewed monopoly pricing, and then extend the concept to a setting where firms own multiple plants. The two key features were: 1) the elasticity of demand and 2) the share of plant capacity that was marginal (could set the price) and inframarginal (would sell power no matter what the price is). As an exercise, draw some graphical examples similar to the ones in the slides. Can you label the gains from raising price and the losses from lost sales when price increase? Can you see visually how these change with the two factors above?
Key points
- Electric power markets will not supply the socially efficient level of power when firms have market power.
- We review what characteristics of markets lead to market power generally, and then discuss these in the context of the electric power sector.
- When firms own many plants, incentives to bid above marginal cost depends on both marginal and inframarginal plant profits.
Additional material
- Explainer “Electricity Markets 101” from RFF
- Borenstein, Severin. 2002. “The Trouble with Electricity Markets: Understanding California’s Restructuring Disaster.” The Journal of Economic Perspectives. link.
Lecture 4
Carbon taxes + Long run investment
Pre-class
- Read the blog post “What can carbon pricing do?” by Severin Borenstein.
Post-class
- Complete this quiz from last year. Submit answers to canvas.
Key points
- Know the channels through which a tax on carbon emissions from electric generators reduces carbon emissions.
- In markets with constant externalities, inefficiency comes simply from consuming too much of the good. In electricity markets, the externality from carbon emissions varies by generator. This introduces allocative inefficiency. Be able to define it and identify on a graph.
- How will a carbon tax effect the LCOE of renewable and fossil fuel generators? How will those two changes effect which plants get built? Which get shut down?
Additional material
Journal of Economic Perspectives - Tangentially related, “Smartest Guys in the Room” is a great documentary about Enron - Great video on What happened during the 2021 Texas Power Grid Outage - Two videos on merit order dispatch and electricity price formation from the Hertie School.