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This mechanism provides a nudge to market participants to
develop a liquid market for these bilateral contract arrangements
at horizons to a delivery similar to the SFPFC products.
the difference between their actual hourly load shape and the
hourly values of their retail load obligation. This mechanism
provides a nudge to market participants to develop a liquid
market for these bilateral contract arrangements at horizons
to a delivery similar to the SFPFC products. Instead of starting from the baseline of a no fixed-price, forward contract
coverage of system demand by retailers, this mechanism
starts with 100% coverage of system demand, which retailers can unwind at their own risk.
For the regulated retail customers, the purchase prices
of SFPFCs can be used to set the wholesale price implicit
in the regulated retail price over the time horizon that
the forward contract clears. This would provide retailers
with a strong incentive to reduce their average wholesale energy procurement costs below this price through
bilateral hedging arrangements, storage investments, or
demand response efforts.
There are several reasons why this mechanism should be
a more cost-effective approach to long-term resource adequacy than a capacity-based mechanism in a zero-marginalcost, intermittent future. First, the sale of SFPFC energy
starting delivery two or more years in the future provides a
revenue stream that will significantly increase investor confidence in recovering the cost of any investment in the new
generation capacity. Second, because retailers are protected
from high short-term prices by total hourly SFPFC holdings
equal to system demand, the offer cap on the short-term market can be raised to increase the incentive for all suppliers to
produce as much energy as possible during stressed system
conditions. Third, the possibility of higher short-term price
spikes can finance investments in storage and load-shifting
technologies and encourage active participation of final
demand in the wholesale market, further enhancing system
reliability in a market with significant intermittent renewable resources.
If SFPFC energy is sold for delivery in four years based
on a proposed generation unit, the regulator should require
the construction of the new unit to begin within a prespecified number of months after the signing date of the contract
or require the posting of a substantially larger amount of
collateral in the clearinghouse with the market operator.
Otherwise, the amount of SFPFC energy that this proposed
unit sold would be automatically liquidated in a subsequent
SFPFC auction, and a financial penalty would be imposed
on the developer. Other completion milestones would have
to be met at future dates to ensure the unit can provide the
amount of firm energy that it committed to provide in the
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SFPFC contract sold. If any of these milestones were not
met, the contract would be liquidated.

Final Comments
There is no perfect wholesale market design. There are
only better wholesale market designs, and what constitutes a better design depends on many factors specific to
the region. The long-term resource adequacy mechanism
should be coordinated with short-term market design.
Although there is general agreement on the key features
of a best-practice, short-term market design, many details
must be adjusted to reflect local conditions. For this reason,
wholesale market design is a process of continuous learning, adaption, and, hopefully, improvement. The standardized energy contracting approach to long-term resource
adequacy described in this article is an example of this
process. While it has many features likely to make it significantly better suited to a zero-marginal-cost, intermittent-renewables electricity-supply industry, there are many
details of this basic mechanism that should be adapted to
reflect local conditions.

For Further Reading
C. Graf, F. Quaglia, and F.A. Wolak, " Simplified electricity
market models with significant intermittent renewable capacity:
Evidence from Italy, " Stanford Univ., CA, Jan. 2020. [Online].
Available: https://ngi.stanford.edu/sites/g/files/sbiybj14406/f
/GrafQuagliaWolak_SimplifiedElectricityMarketModels
Renewables%281%29.pdf
P. R. Gribik, W. W. Hogan, and S. L. Pope, " MarketClearing Electricity Prices and Energy Uplift, " Harvard
Electricity Policy Group, Cambridge, MA, Dec. 31, 2007.
W. W. Hogan, " Electricity market restructuring: Reforms
of reforms, " J. Regulatory Econ., vol. 21, no. 1, pp. 103-132,
2002. doi: 10.1023/A:1013682825693.
F. C. Schweppe, M. C. Caramanis, R. D. Tabors, and R.
E. Bohn, Spot Pricing of Electricity. Springer Science &
Business Media, 2013.
F. A. Wolak, " Wholesale electricity market design, " in
Handbook on the Economics of Electricity Markets, J. M.
Glanchant, P. L. Joskow, and M. Pollitt, Eds. Cambridge,
U.K.: Cambridge Univ. Press, 2020.

Biography
Frank A. Wolak is with Stanford University, California,
USA.
p&e

january/february 2021

https://ngi.stanford.edu/sites/g/files/sbiybj14406/f/GrafQuagliaWolak_SimplifiedElectricityMarketModelsRenewables%281%29.pdf https://ngi.stanford.edu/sites/g/files/sbiybj14406/f/GrafQuagliaWolak_SimplifiedElectricityMarketModelsRenewables%281%29.pdf https://ngi.stanford.edu/sites/g/files/sbiybj14406/f/GrafQuagliaWolak_SimplifiedElectricityMarketModelsRenewables%281%29.pdf

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