IEEE Power & Energy Magazine - January/February 2021 - 42

States, utilities, and companies have introduced mandates
or goals to supply 100% of energy by renewable resources or
nonemitting resources. (See Figure 1.) As of early May 2020,
16 states have adopted 100% clean/renewable mandates or
targets, and more have adopted less-stringent goals. Finally,
many of the organized markets are already experiencing
high levels of instantaneous amounts of variable renewable
energy (VRE), such as wind and solar. These experiences
demonstrate that studying power systems with 100% zerofuel-cost supply is not an academic exercise. Efficiently
designed electricity markets can enable solutions to meet
these goals while providing affordable and reliable electricity to consumers.
In this article, the authors discuss some key challenges and
potential options for designing electricity markets when the
supply fleet lacks fuel costs. This includes the transition to meet
these goals as well as the designs incentivizing the investment
in and operation of the future supply fleet. Before describing
potential future designs, it is important to highlight current
efforts to overcome challenges and improve market designs.

Key Questions Facing Market Designers
With decarbonization goals, the future supply fleet may look
quite different from the current one. It may consist of substantial amounts of VRE and hydropower, other enabling
technologies like short-term or seasonal electric storage,
greater levels of responsive demand, and local resources of
numerous technology types (either on the distribution system
or customer sited). It may also consist of other low-carbon
resources like nuclear power and some remaining efficient
thermal plants. Except for some remaining fuel-burning
technologies, the future and current supply fleets will have
something in common: variable operating costs that are not
dependent on fuel costs.
At the core of any future scenario is VRE. VRE has several unique characteristics that are important to consider,
given the quantities of VRE that may be present in these scenarios. VRE production depends on the weather, meaning
that the available energy changes across time and cannot be
predicted with perfect accuracy. VRE also has other unique
technical characteristics, such as its inverter-based interface.
Finally, because VRE depends on the weather for production, it has essentially zero variable costs, with most of its
costs tied to capital. Each of these characteristics may influence future electricity market outcomes in different ways.
Similar to other commodities, wholesale electricity prices
indicate when supply is limited and demand reduction is
most valuable (high-price periods) or when supply is abundant and increased demand can be met with little additional
cost (low-price periods). These wholesale pricing signals
provide a coordinating role across various decisions, both
for short-run operational decisions and long-run investment
and retirement decisions. In recent years, the dominant
driver of annual changes in average wholesale electricity
prices has been natural gas prices, as natural gas generators
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have been the predominant price-setting technology. Over
the past decade, the boom in U.S. shale gas production has
driven prices well below their historical averages.
Growth in VRE is starting to have noticeable effects
on wholesale electricity prices. VRE's lack of fuel costs
pushes the supply curve out during periods of high VRE
production. Without corresponding growth in demand or
the retirement of surplus capacity, this results in the meritorder effect, that is, lower electricity prices. It also can lead
to more variable prices across time and space as well as
impacts on the prices of ancillary services, depending on
conditions. However, the true impact on prices is not always
simple to understand or predict.
The impacts of increased solar production on price patterns are obvious in the California ISO (CAISO), where solar
produced more than 18% of annual demand in 2019. This
has contributed to lower prices during midday, particularly
in spring, but also pushes high-priced periods into the early
evening after sunset. Thermal resources that are decommitted during midday may find it more difficult to supply energy
after sunset because of commitment constraints. These temporal patterns and variability effects of prices can incentivize increased flexibility from both the supply and demand
sides. The springtime supply abundance can also impact the
ability to provide downward reserves from resources that are
required to be online and generating above a minimum level.
Thus, reductions in energy prices can simultaneously occur
with increases in downward reserve prices (Figure 2).
Lawrence Berkeley National Labs has performed several
simulations of market prices in futures with higher VRE penetrations for various U.S. regions, which show similar trends
as the historic declining price impacts. Higher VRE levels
were observed to lower average energy prices, increase price
variability, increase the frequency of zero-energy prices,
and increase prices for ancillary services. A variety of other
studies have shown a range of wholesale price impacts from
VRE, using a variety of different assumptions affecting the
results (Table 1). The range in values demonstrates the difficulty in trying to predict this impact.
Although these simulations show a reduction in average
energy prices due to increased VRE, this may not necessarily be the case on future systems approaching 100% renewable energy. Several assumptions in these studies may not
always hold in practice. It is not clear that wholesale prices
will simply decline, as observed in studies. This may depend
on many factors, such as
✔✔ the market structure, including compensation and investment incentives beyond energy markets (e.g., capacity markets)
✔✔ exogenous planning reserve margins
✔✔ outside policies influencing investment
✔✔ responsiveness of demand to price
✔✔ the existence and settings of administrative shortage
pricing
✔✔ VRE locations and the correlation of production
january/february 2021

IEEE Power & Energy Magazine - January/February 2021

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