Is scarcity pricing a viable approach to resource adequacy in a FERC Order 2222 ecosystem?
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- Oct 14, 2020 3:36 pm GMTOct 14, 2020 4:04 pm GMT
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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.