More transparency and less prescriptive rules will help electricity markets thrive

WASHINGTON (Aug. 31, 2017) – States that have chosen to scrap the monopoly utility model for competitive electricity markets have seen more efficient and reliable electricity and greater investment in bulk transmission. But there’s still a need for improvements to these organized markets to ensure they appropriately price attributes like scarcity and reliability, according to a new policy study from the R Street Institute.

As the energy mix shifts to include more variable resources like wind and solar and use-limited resources like energy storage, the challenges multiply for market design and administration to produce accurate price signals, argues the paper’s author, R Street Electricity Policy Manager Devin Hartman.

“When there are inconsistencies between market prices and system dispatch, existing resources may be used inefficiently, investment signals can be muted and it can elevate concerns about reliability,” Hartman writes. “The situation also creates false arbitrage opportunities, which lead to market manipulation.”

With new leadership in place at the Federal Energy Regulatory Commission, and a number of important rulemaking efforts related to price formation already in the works, the time is ripe to consider market design changes, while exercising caution to avoid rules that are either overly prescriptive or that are designed to pick winners and losers among resources or technologies, Hartman writes.

“More sunlight, limited prescription and performance-based regulation offer a pathway to efficient markets and good governance,” Hartman writes. “With that, further enhancements to price formation will extend U.S. leadership on electricity policy and make the economy more competitive for decades to come.”

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