Private Risk and Social Resilience in Liberalized Electricity Markets

Joule, Volume 6, Issue 2, 369 - 380

30 Pages Posted: 7 Oct 2021 Last revised: 15 Jun 2022

See all articles by Jacob Mays

Jacob Mays

Cornell University

Michael Craig

University of Michigan School for Environment and Sustainability

L. Lynne Kiesling

affiliation not provided to SSRN

Joshua Macey

University of Chicago Law School

Blake Shaffer

University of Calgary

Han Shu

Cornell University, Ithaca, New York

Date Written: September 29, 2021

Abstract

Energy-only electricity markets, such as the Electric Reliability Council of Texas (ERCOT), rely on the decentralized investment decisions of market participants to lead to a resource mix providing an efficient level of reliability. During an exceptionally cold winter storm in February 2021, ERCOT experienced shortfalls on an unprecedented scale, with nearly half of the generation fleet experiencing outages at the peak. The depth of the resulting blackouts invites questions regarding the ability of systems relying on decentralized planning to appropriately prepare for and withstand rare events. Based on two mild assumptions, risk aversion among investors and incomplete risk trading, this paper offers an explanation for why decentralized markets are prone to underinvestment in resilience. We describe the nature of the incomplete risk trading that arises in the context of electricity markets and discuss potential remedies, including mandatory contracting obligations for retailers and compensation to end users for unserved energy.

Keywords: Electricity market design, resilience, resource adequacy, risk trading, incomplete contracting

Suggested Citation

Mays, Jacob and Craig, Michael and Kiesling, L. Lynne and Macey, Joshua and Shaffer, Blake and Shu, Han, Private Risk and Social Resilience in Liberalized Electricity Markets (September 29, 2021). Joule, Volume 6, Issue 2, 369 - 380, Available at SSRN: https://ssrn.com/abstract=3936984 or http://dx.doi.org/10.2139/ssrn.3936984

Jacob Mays (Contact Author)

Cornell University ( email )

Ithaca, NY 14853
United States

Michael Craig

University of Michigan School for Environment and Sustainability ( email )

L. Lynne Kiesling

affiliation not provided to SSRN

No Address Available

Joshua Macey

University of Chicago Law School ( email )

1111 E 60th St
Chicago, IL 60637
United States

Blake Shaffer

University of Calgary ( email )

University Drive
Calgary, Alberta T2N 1N4
Canada

Han Shu

Cornell University, Ithaca, New York ( email )

New York
United States

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