Reliability Options in Renewables-Dominated Electricity Markets

Shaun McRae and Frank A. Wolak

No 32616, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Recent energy shortfalls in renewables-dominated electricity markets call for a mechanism to ensure demand is met under all system conditions. We demonstrate severe shortcomings of an increasingly popular mechanism—reliability options—caused by its interaction with fixed-price forward contracts for energy. Large generators can trigger the option exercise, weakening the short-term incentive to sell output provided by forward contracts alone. In the longer term, hydro generators sell more forward contracts and store less water, reducing system reliability. We empirically show that Colombian generators respond to these incentives. We analyze a standardized energy contracting approach to long-term resource adequacy that does not create these economic incentives.

JEL-codes: L13 Q40 (search for similar items in EconPapers)
Date: 2024-06
New Economics Papers: this item is included in nep-des, nep-ene, nep-ind and nep-reg
Note: EEE IO
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