Efficient pricing of electricity revisited

Increasing shares of intermittent renewable energies challenge the dominant way to trade electricity ex-ante in forward, day-ahead, and intraday markets: Coal power plants and consumers cannot react to the stochastic element of renewables, whereas gas turbines can. We use a theoretical model to analyze behavior of final consumers and incentives of perfectly competitive firms to invest in different types of technologies under ex-ante pricing. Curtailed consumers need to get compensated in high of their disruption cost. Coal power firms recover cost. Renewables and gas turbine firms fail. We identify imperfections that arise from the delay in price setting and market clearing. Do real-time prices induce an efficient outcome? Consumers need to get taxed in high of rationing cost. Support is redundant for gas turbine firms, but renewables firms still fail to recover cost because the spatially distributed nature of renewables creates an output risk.

Automated summary

The increasing shares of intermittent renewable energies pose challenges to the traditional way of trading electricity, as coal power plants and consumers cannot react effectively to the stochastic element of renewables. The study reveals that current market mechanisms are insufficient in addressing issues related to consumer compensation, cost recovery for companies, and market imperfections, with gas turbine companies having unnecessary support and renewable energy companies struggling to recover costs due to output risks.