Long-term issues with the Energy-Only Market design in the context of deep decarbonization

Alexis Lebeau, Marie Petitet, Simon Quemin and Marcelo Saguan

Energy Economics, 2024, vol. 132, issue C

Abstract: There has been fierce controversy in the literature over the long-run efficiency of the energy-only market (EOM) design ever since its inception. In this paper, we provide novel insights to illuminate this historical controversy, and we revisit it with a focus on contemporary issues and the profound changes brought about by the energy transition. Specifically, we develop an analytical and modeling framework to quantitatively investigate how EOM outcomes hinge on the underlying behavioral, informational and structural assumptions. We apply our framework to a case study calibrated on Californian fundamentals that captures the key features of energy systems under deep decarbonization. We characterize how EOM outcomes can substantially deviate from the long-run optimum as soon as one assumption is relaxed compared to theoretical requirements. This leads to pathways with higher electricity prices, lower security of supply and delayed decarbonization. In particular, we highlight how market price signals alone are prone to a dynamic entry-exit coordination problem between investment in low-carbon assets and the phaseout of fossil-fired assets. This calls for a market design reform to complement price signals that accounts for realistic assumptions.

Keywords: Electricity Market Design; Energy-Only Market; Investments and Retirements; Decarbonization; System dynamics; Generation Expansion Planning (search for similar items in EconPapers)
JEL-codes: C63 D47 D81 L94 P18 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:132:y:2024:i:c:s0140988324001269

DOI: 10.1016/j.eneco.2024.107418

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