Amid renewable-energy boom, study explores options for electricity market

Renewable energy sources like wind and solar generation now account for over 20% of electricity in the U.S., and keep growing after large-scale production has more than doubled since 2000.

Still, high-profile power failures illustrate persistent challenges from the lack of available capacity to provide enough energy at times of need, said Chiara Lo Prete, an associate professor of energy economics in the John and Willie Family Department of Energy and Mineral Engineering at Penn State.

The issue isn’t insufficient generation, but an unreliable ability to deliver ample power when customer use spikes, particularly where renewable resources and natural gas dominate power production, Lo Prete said. To better support the clean-energy transition, she and colleagues at a Washington, D.C.-based nonprofit recently studied 11 electricity market design proposals under consideration by grid operators. These designs put forward different approaches to guide energy generation and sources, as well as use across every sector of the energy market.

The proposals, yet to be tested in the market, range from a modest variation on current market designs to a complete overhaul. Researchers organized proposals into five categories from least to most dramatic, including concepts for long-term contract auctions and a two-pronged approach combining long- and short-term markets.

“Market structures should allow utility operators to recover both fixed and variable costs so they foster greater system reliability overall,” Lo Prete said.

Findings published in the journal Energy Economics spotlight key questions confronting utility decision makers and can shape more research into adjusting electricity markets. Lo Prete explained that forecasting overall demand—expected to see historic growth of 25% by 2030 and 78% by 2050—will be especially difficult as transportation electrifies and more data centers come online.

Mandatory “forward contracts,” or advance obligations by distributors to purchase specific amounts of electricity from power generators, could help support investments in resources that are instrumental in meeting decarbonization objectives, she said.

Lo Prete noted the February 2021 system failure in Texas that left more than 4.5 million homes without power; rolling outages in California in August 2020; and near-blackouts, also in the Golden State, in September 2022. In each instance, the underlying problem was a lack of accessible energy in the moment of greatest demand, she said.

Such situations have led grid operators to weigh the market approaches reviewed by researchers in their study, Lo Prete said. Reforms on the table would attempt to accommodate ongoing shifts in power generation, whether through longer-term auctioning of future electricity supplies, more centralized resource planning or other mechanisms like so-called “swing contracts.” They seek to ensure the availability of power production capabilities for dispatch in future operating periods.

“When the markets were restructured in the late 1990s, the energy system was very different from the one we have today,” Lo Prete said.

At that point, the system centered on thermal power plants driven by fossil fuels and nuclear energy. Utility markets today aren’t structured to integrate and sustain the renewable sources and large-scale electricity storage that have taken root since then.

Still, maintaining a range of power generation is vital, as older facilities like coal-powered plants contribute less to the power supply but remain important to consistent service, Lo Prete said. Last year, coal accounted for 8% of primary energy consumption nationally, down from 23% in 2000, according to a congressional report.

For their study, Lo Prete and her research partners at Resources for the Future (RFF) examined market proposals to assess energy affordability, efficiency, energy adequacy and other factors. Lo Prete, a faculty associate of the EMS Energy Institute and the Institute of Energy and the Environment and a Wilson Faculty Fellow at Penn State, completed a sabbatical at RFF ahead of the paper’s publication.

Among their conclusions, researchers found the organization of regulatory oversight makes it more difficult to incorporate clean-energy policy into electricity markets. Those “forward contracts” requiring specific electricity purchases could promote energy storage and power systems’ overall ability to fulfill customer needs, they found.

At the same time, the authors said it was tough to make recommendations or endorse one proposal over others, in part because the concepts were in different stages of development. Researchers cited specific concerns over inadequate investment incentives in current energy markets.

The authors also urged cooperation among energy-market researchers, encouraging them to make proposals accessible to broad audiences and facilitate input and feedback from those constituents. Communication will help researchers understand concerns and possible points of confusion, they said.

At Resources for the Future, contributing to the paper were Karen Palmer, senior fellow and director of the Electric Power Program, and associate fellow Molly Robertson.