Price formation in zero-carbon electricity markets – Fundamentals, challenges, and research needs

Zhi Zhou, Audun Botterud and Todd Levin

Renewable and Sustainable Energy Reviews, 2025, vol. 211, issue C

Abstract: Future power systems dominated by zero-carbon generation resources may require significant revisions to electricity market designs to ensure capacity adequacy and market efficiency. In this paper, we first conceptually outline key fundamentals underlying electricity market design and price formation in U.S. electricity markets. We then discuss a set of potential market design challenges related to price formation in a grid dominated by zero-carbon resources with marginal cost profiles that differ compared to traditional thermal resources. Next, we review electricity market design solutions that have been proposed in the literature to ensure market efficiency in zero-carbon systems, and the associated implications for price formation. We conclude by summarizing key observations and establishing a set of research questions that should be addressed to improve our understanding of market design, price formation, and market efficiency in zero-carbon power systems.

Keywords: Zero-carbon; Electricity markets; Price formation; Flexible resources (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1016/j.rser.2024.115250

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