Price Formation and Grid Operation Impacts from Variable Renewable Energy Resources

Abstract

Increasing amounts of Variable Renewable Energy Resources (VREs) impact electricity markets and their operation. VREs are intermittent, zero marginal cost resources that tend to displace emissions-intensive generators in electricity dispatch, reducing emissions, but impacting price formation, revenue sufficiency, reliability, and market power mitigation processes of electricity markets. But VREs are not the only factor that affects operational and financial challenges in electricity markets. Declining natural gas prices, changing resource mixes, as well as different electricity market designs and regulatory policies all factor into the challenges both electricity market participants and operators face in today’s electricity markets. With this in-depth examination of electricity markets and related literature review, we aim to inform on key challenges of market design and operation for successful integration of large amounts of zero marginal cost resources. We’ve identified several areas, including VREs impact on price formation, revenue sufficiency, reliability, market power monitoring and mitigation, as well as how state-level incentives and market design impact VREs and these challenges. With each key challenge, we survey the literature to answer the question: To what extent is the problem, and how has it evolved over time? We first conduct a thorough review of ongoing challenges in electricity markets to understand the problem and review the empirical literature to capture important findings on how VREs, specifically, impact the problem. From this review, we highlight metrics that are important to understanding VRE integration and how market designs and outcomes are evolving with increasing levels of VREs. We propose several empirical models for future research to determine the impact of VREs on these identified challenges.