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Is scarcity pricing a viable approach to resource adequacy in a FERC Order 2222 ecosystem?

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There has been a lot of talk recently about the need for scarcity pricing of electricity in wholesale markets as a means to send price signals for resource adequacy requirements to markets. As you all know I'm not an economist and I'll never claim to be skilled in such matters that economists tackle. I'm a software engineer with experience in developing capacity market clearing engines, i.e. ISO-NE's FCM MCE, hence my interest in solutions for resource adequacy. I've seen a few papers on scarcity pricing, mostly from Professor Hogan at Harvard. It appears that scarcity pricing refers to a system event where resource shortages exist in real-time, which causes electricity prices to rise - hence the term scarcity pricing. Which makes me wonder; is scarcity pricing an economist dream but a grid operators’ nightmare? The scarcity pricing papers I read were from the early 2000's, which were based on a centralized supply solution, i.e. large generators supplying electricity via transmission lines to local distribution entities to satisfy consumer demands for electricity. But I wonder - does scarcity pricing still make sense in a FERC Order 2222 ecosystem where there are thousands of supply resources at very granular locations supplying "essential grid services", as order 2222 indicates? I don't know the answer to this question, but I'm hoping the recently announced CAISO investigation into scarcity pricing will provide some insights in this regard.

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Matt Chester's picture
Matt Chester on Oct 14, 2020

The scarcity pricing papers I read were from the early 2000's, which were based on a centralized supply solution, i.e. large generators supplying electricity via transmission lines to local distribution entities to satisfy consumer demands for electricity. But I wonder - does scarcity pricing still make sense in a FERC Order 2222 ecosystem where there are thousands of supply resources at very granular locations supplying "essential grid services", as order 2222 indicates?

Interesting line of questioning, Dick-- it would be foolish to assume that something known about the utility industry 15+ years ago applies to the utility industry we know today and anticipate being the case tomorrow. Does having more actors make scarcity pricing more or less viable? For individuals acting on a small scale (let's say a home with solar panels, a battery bank, and an EV), scarcity pricing might motivate my action to conserve or dispatch out my resources at the appropriate times-- though of course there will be times when my immediate power needs are higher priority (e.g., not cutting power use completely during a heat spell). Will enough of those individual actors respond as desired? And will the increase in those inflection points be more or less effective than smaller but larger points of generation? 

Like you I'm no economist so my questions are more rhetorical, but compelling to chew over. 

Richard Brooks's picture
Richard Brooks on Oct 14, 2020

Excellent points, Matt. There are a lot of factors to consider in this rapidly changing landscape we call the electricity grid. As professor Hogan points out in his 2006 paper "Providing consistent incentives and risk allocations that encourage the right investment in the right infrastructure, in the right places, and at the right times remains a persistent challenge in electricity market design. In addition to keeping the lights on, providing adequate investment is a fundamental test of using markets to improve performance in electricity systems."

I'm looking forward to CAISO's findings.

Richard Brooks's picture

Thank Richard for the Post!

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