Electricity market basics
Slides [link]Key Points
- Lecture 1: Basics of electric power generation
- Grid + Technologies
- Avg vs fixed cost tradeoff
- Nonstorability + varying demand
- Externalities
- Lecture 2: Regulation
- Natural monopoly conditions
- How to set prices?
- Incentives for investment
- Lecture 3: Deregulation
- Where could markets?
- How deregulated markets work
- How price are set in both regimes
- What could go wrong: CA crisis
- Evidence to date
- Lectures 4/5: Electricity market game
- Using simulation to understand deregulated markets
- Using simulation to understand carbon taxes
Reading and response questions
Lecture 1
- Watch “How does the power grid work?”
- Listen to this Planet Money Episode “The World’s Biggest Battery”
Response questions:
- What are some unique aspects of electricity supply and demand, compared to other markets? (2-3 sentences)
- Why is energy storage important for renewable energy? (2-3 sentences)
Lecture 2
Regulation
This classes will be about the economics of regulation, with an emphasis on natural monopolies.
Required reading
- Read - Chapter 12 from the textbook, “Economics of Antitrust and Regulation” by Viscusi, Henderson and Vernon.
- Optional: Chapter 11
Response questions:
- At a high level, how were prices set in regulated electric power markets? (3-4 sentences is plenty)
- What determines the amount of profit that a regulated utility makes? (1-2 sentences)
Lecture 3
- 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:
- Why are electricity prices so volatile? (2-4 sentences)
- Consumers are generally shielded from this volatility. What is the problem with stable monthly bills and volatile marginal costs? (one paragraph)
Lecture 4
Electricity Game Intro
To help reinforce the concepts discussed last week, this week we’re going to be playing the Stanford Energy Market Game. This game simulates the California electricity market.
- Read the Energy Market Game About page and player tutorial.
- 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.
Response questions:
- How do generators make money in a uniform price auction like the one described in the last video? Do you think power plants make more money if they bid their true costs or if the bid higher or lower? Response should one paragraph. Don’t worry if you don’t “know” the answer, just try to reason through it.
Lecture 5
- Read RFF’s Carbon Pricing 201 Explainer
- Read the blog post “What can carbon pricing do?” by Severin Borenstein.
Response questions:
- What are the channels through which a tax on carbon emissions from electric generators reduces carbon emissions?
- Which channel do you think will be most important (ie will result in the biggest drop in emissions)?
Additional material
- Griffin and Puller 2005. “A Primer on Electricity and the Economics of Deregulation” (pages 1-20). link
- 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).
- Great video on What happened during the 2021 Texas Power Grid Outage