IEEE Power & Energy Magazine - January/February 2021 - 30

volatility, which can finance investments in storage and
other technologies that allow consumers to shift their withdrawals of grid-supplied energy away from periods when
little wind and solar energy is being produced.
An increased risk of large intermittent energy shortfalls
and short-term price volatility implies a greater need for
risk management activities. Greater short-term intermittent
energy supply risk is likely to require accounting for more
transmission and generation operating constraints in the
day-ahead and real-time energy markets as well as purchasing more operating reserves and creating additional ancillary service products. Because controllable generation units
are likely to have to start and stop more frequently to make
up for unexpected renewable energy shortfalls, there will be
a greater need to develop short-term pricing approaches that
recover the associated start-up and minimum load costs.
The potential for sustained periods of low intermittent
energy production creates both a medium and long-term
energy supply risk that requires a new long-term resource adequacy mechanism. The traditional capacity-based approach
is unlikely to be the least-cost mechanism for ensuring that
the future demand for energy is met. In a zero-marginal-cost,
intermittent future, wind and solar resources must hedge their
energy supply risk with controllable generation resources to
maintain long-term resource adequacy. Cross hedging between
these technologies accomplishes two goals: First, it can provide the revenue stream necessary for fixed cost recovery by
controllable generation units. Second, it ensures that there is
sufficient controllable generation capacity to meet demand
under all foreseeable future system states with a high degree
of confidence.
The remainder of this article first describes the key features of an efficient short-term wholesale market design: a
multisettlement locational marginal pricing (LMP) market
with an automatic local market power mitigation (LMPM)
mechanism, which is the standard market design for all shortterm markets in the United States. This section concludes with
a discussion of the modifications to this basic design that are
likely to be necessary to accommodate a larger share of intermittent renewables.
The second half of the article describes a new long-term
resource adequacy mechanism for the efficient short-term
market design for an electricity supply industry with a large
share of zero-marginal-cost, intermittent renewables. I first
explain why a wholesale electricity market requires a longterm resource adequacy mechanism. Then, I describe a mandated, standardized long-term contract approach to long-term
resource adequacy that provides strong incentives for intermittent renewable resource owners to hedge their energy supply
risk with controllable generation resource owners. I argue that
this mechanism ensures long-term resource adequacy at a reasonable cost for final consumers while also allowing the shortterm wholesale price volatility that can finance investments in
storage and other load-shifting technologies necessary to manage a large share of intermittent renewable resources.
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Short-Term Market Design
More than 25 years of international experience with wholesale electricity market design has identified four crucial
features of efficient short-term market design. First is the
extent to which the market mechanism used to set dispatch
levels and locational prices is consistent with how the grid
and generation units operate. Second is a financially binding day-ahead market that prices all transmission and generation unit operating constraints expected to be relevant
in real time. The third is an automatic LMPM mechanism
that limits the ability of a supplier to influence the price it
receives when it possesses a substantial ability to exercise
market power. The fourth feature is retail market policies
that foster active participation of the final demand in the
wholesale market.
The early U.S. wholesale market designs in the PJM Interconnection, ISO New England, California, and Texas
employed simplified versions of the transmission network
configuration and generation unit operating constraints.
Similar market designs currently exist throughout Europe
and the rest of the world. They set a single market-clearing
price for an hour or half-hour for an entire control area or
large geographic regions, even though in real time there are
often generation units with offer prices below this marketclearing price not producing electricity. Likewise, there
are units with offer prices above this market-clearing price
producing electricity. This outcome occurs because of the
location of demand and available generation units within the
region, and the configuration of the transmission network
prevents some of these low-offer price units from producing
electricity and requires some of the high-offer price units to
supply electricity.
This approach to short-term market design provides incentives for suppliers to take actions to exploit the fact that " in
real time physics wins, " rather than offering their resources
into the day-ahead market in a manner that minimizes the
cost of meeting demand at all locations in the grid in real
time. Instead, suppliers take actions in the simplified dayahead market that allow them to profit from knowing they
will be needed (or not needed) in real time because of transmission and generation unit operating constraints.

Locational Marginal Pricing
Starting with PJM in 1998 and ending with Texas in late 2010,
all U.S. wholesale markets adopted a multisettlement LMP
market design that cooptimizes the procurement of energy
and ancillary services and includes an automatic LMPM
mechanism built into the market software. This design has
a day-ahead financial market that satisfies the locational
demands for energy and each ancillary service simultaneously for all 24 h of the following day. A real-time market
then operates using the same network model as the day-ahead
market adjusted to real-time system conditions. Deviations
from purchases and sales in the day-ahead market are cleared
using these real-time prices. Both of these markets price all
january/february 2021

IEEE Power & Energy Magazine - January/February 2021

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