IEEE Power & Energy Magazine - January/February 2021 - 32

markets and automatically mitigate the offers of suppliers
deemed to have a substantial ability to exercise unilateral
market power, they are effective at preventing the exercise
of significant local market power with little disruption to the
operation of the short-term market.

hull pricing and other market-clearing mechanisms that
limit the magnitude of make-whole payments will need to
be developed.

Benefits of a Multisettlement LMP Market

Why do wholesale electricity markets require a regulatory
mandate to ensure long-term resource adequacy? Electricity is essential to modern life, but so are many other goods
and services. Consumers want cars, but there is no regulatory mandate that ensures enough automobile assembly plants to produce them. They want point-to-point air
travel, but there is no regulatory mandate to ensure enough
airplanes to accomplish this. Many goods are produced
using high-fixed-cost, low-marginal-cost technologies,
similar to electricity supply. Nevertheless, these firms
recover their cost of production, including a return on the
capital invested, by selling their output at a market-determined price.
So, what is different about electricity that requires a longterm resource adequacy mechanism? The regulatory history
of the electricity supply industry and the legacy technology
for metering electricity consumption results in what I call a
reliability externality.

A multisettlement LMP market design can facilitate the
active participation of final consumers in the wholesale
market and reduce both the input fuel and total variable
cost of producing the same amount of thermal energy relative to the multisettlement zonal market design. The presence of an automatic LMPM mechanism and make-whole
payments that guarantee start-up, minimum load, and
energy cost recovery for the day for all generation units
committed to operating in the day-ahead market reduces
the incentive for suppliers to exercise unilateral market
power. An expected profit-maximizing supplier with no
ability to exercise unilateral market power will submit an
offer price equal to its marginal cost because make-whole
payments ensure recovery of its start-up, minimum load,
and energy costs.
Because day-ahead purchases are firm financial commitments, a retailer can sell energy purchased in the day-ahead
market at the real-time price by consuming less than its
day-ahead energy schedule. This eliminates the need for the
regulator to set an administrative baseline relative to which a
retailer sells demands reductions. The day-ahead market also
allows retailers and large consumers to submit price-sensitive
bid curves into the day-ahead market to reduce the marketclearing price and the quantity of energy they purchase in the
day-ahead market.

Modifications for Large-Scale Intermittent
Renewables Deployment
A multisettlement LMP market design is capable of managing a generation mix with a significant share of i-ntermittent
-renewables. However, some modifications are likely to be
needed as the share of intermittent renewable resources
increases. Additional operating constraints will need to be
incorporated into the day-ahead and real-time market models for reliable system operation with an increased quantity
of intermittent renewables.
Introducing additional ancillary services to accommodate
a larger share of intermittent renewable energy may also be
needed. For example, California introduced a fast-ramping
ancillary service product that compensates controllable
generation units not supplying energy during certain hours
of the day in order to have sufficient unloaded capacity
to meet the rapid increase in net demand (the difference
between system demand and renewable generation) in
the early evening, when the state's solar resources stop
producing. Because controllable resources are likely to
have to start and stop more frequently as the share of intermittent resources increases, implementations of convex
32

ieee power & energy magazine

Resource Adequacy With Significant
Intermittent Renewables

The Reliability Externality
Different from the case of wholesale electricity, in the market for automobiles and air travel there is no regulatory prohibition on the short-term price rising to the level necessary
to clear the market. Airlines adjust the prices for seats on
a flight over time in an attempt to ensure that the number
of customers traveling on that flight equals the number of
seats flying. This ability to use price to allocate the available seats is also what allows the airline to recover its total
production costs.
Using short-term pricing to manage the real-time supply
and demand balance in a wholesale electricity market is limited by a finite upper bound on a supplier's offer price and/or
a price cap that limits the maximum market-clearing price.
Although offer and price caps can limit the ability of suppliers to exercise unilateral market power in the short-term
energy market, they also reduce the revenues suppliers can
receive during scarcity conditions. This is often referred to
as the missing money problem for generation unit owners.
However, this missing money problem is only a symptom of
the existence of the " reliability externality. "
This externality exists because offer caps limit the cost
to electricity retailers of failing to hedge their purchases
from the short-term market. Specifically, if the retailer or
large consumer knows the price cap on the short-term market is US$250/MWh, then it is unlikely to be willing to
pay more than that for electricity in any earlier forward
market. This creates the possibility that real-time system conditions can occur where the amount of electricity
demanded at or below the offer cap is less than the amount
january/february 2021

IEEE Power & Energy Magazine - January/February 2021

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