Electricity market basics

Slides [link]

Key Points

• Basics of electric power generation
  • Grid + Technologies
  • Avg vs fixed cost tradeoff
  • Nonstorability + varying demand
• Natural monopolies
  • Conditions
  • How to set prices?
  • Incentives for investment
• Deregulation
  • Theory: what is separable?
  • How deregulated markets work
  • Comparing prices
  • What could go wrong: CA crisis
  • Evidence to date

Required reading and response questions

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Lecture 1

• Watch “How does the power grid work?”
• Read Griffin and Puller 2005. “A Primer on Electricity and the Economics of Deregulation” (pages 1-20). link

Response questions:

1. From an economic perspective, what is so special about electricity? (2-3 sentences)
2. Why does this make it volatile and hard to regulate? (2-3 sentences)

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Lecture 2

• Borenstein, Severin. 2002. “The Trouble with Electricity Markets: Understanding California’s Restructuring Disaster.” The Journal of Economic Perspectives. link. Don’t get too bogged down in all the details (long term contracts, negawatts, etc). Try to pay attention to the high level narrative and economic concepts
• Optional explainer “Electricity Markets 101” from RFF

Response questions:

1. We discussed last class why electricity prices are so volatile. What is the issue with volatile real-time prices and stable monthly bills? (2-4 sentences)
2. Do you think electricity markets are “worth it”? Or is the old regulation model better? (one paragraph)

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Additional material

• VHV ERA Chapter 11 (up through page 417) On Canvas. This provides an accessible theoretical treatment of regulating natural monopolies.
• Borenstein, Severin, and James Bushnell. 2015. “The US Electricity Industry After 20 Years of Restructuring.” Annual Review of Economics 7 (1): 437–63. link
• Joskow 1997. “Restructuring, Competition and Regulatory Reform in the U.S. Electricity Sector”, Journal of Economic Perspectives
• Tangentially related, “Smartest Guys in the Room” is a great documentary about Enron
• The Regulatory Assistance Project has a series of explainer videos on power markets. As an example, this video covers levelized cost of energy and it’s relationship to “dispatch” (ie the short run supply curve).
• In the readings and in lecture we said storage wasn’t possible. But in fact some storage does exist. Check out this Planet Money Episode “The World’s Biggest Battery” highly recommended