Power Markets? What Power Markets? We Only Get the Pretense of Markets and That's the Problem. End All Subsidies Now!

Planning Engineer Russ Schussler writes at Judith Curry's site to correct the record on the real costs of solar and wind energy. The following is a consolidated version of Part III of the story.

Part 3 of this series examines power markets, promoted by policymakers (FERC) and industry advocates to lower costs through competitive bidding and merit-order dispatch. While markets can optimize resource allocation in many sectors, they struggle to deliver affordability and reliability in electricity systems dominated by intermittent renewables. This post first explains how power markets operate, then highlights their challenges, and finally explores why they amplify the cost challenges associated with wind and solar.

In Part 1 of this series, we explored how the fat tail problem undermines the cost-saving potential of wind and solar. It’s easy to supply electricity most of the time. The fat tail occurs in the rarer periods of maximal demands, when wind and solar are not available. These periods, not savings during easy times, drive system economics. Part 2 discussed how rate structures distort perceptions of affordability for solar applications.

Power markets use a merit-order dispatch system, where generators bid their costs, and the market sets prices based on the most expensive unit needed. During “easy” times—when demand is low or renewable output is high—wind and solar often dominate. Their near-zero marginal costs (no fuel expenses) allow them to bid low, displacing higher-cost fossil fuel plants and driving down market prices. This creates the appearance of cheap electricity and fuels the narrative that renewables are inherently cost-effective.

However, during peak or extreme conditions, wind and solar often underperform due to weather or diurnal constraints. For example, wind speeds may drop during heatwaves, or solar outut may be negligible at night or during cloudy winters. When demand spikes or renewables falter, markets rely on dispatchable resources—combined cycle plants, combustion turbines, or even older coal units—to meet the shortfall.

These resources have higher marginal costs and are often called upon during the most expensive hours, driving market prices skyward. During Winter Storm Uri in February 2021, ERCOT prices surged to $9,000/MWh as renewables underperformed and demand soared. As discussed in the first posting, doing well most of the time is not enough. The challenge in providing costly backup during peak shortages exposes the limitations of power markets, as explored below.

I am a big fan, in general, of markets over central planning and the wonders of the Invisible Hand. Markets are powerful tools for aligning supply and demand, often outperforming centralized planning by incentivizing competition and innovation. However, it should be understood that markets do not work well for every good and service at every time and place…

Electricity differs from most commodities, with highly inelastic demand and a need for instantaneous balance between supply and demand to maintain grid stability. Unlike markets for goods like wheat or electronics, where substitutes abound, electricity has few viable alternatives. Storage technologies, such as batteries, remain costly and limited, unable to support seasonal needs, leaving utilities reliant on traditional generation (e.g., natural gas, coal, nuclear) to fill gaps left by intermittent wind and solar. This complexity makes electricity a poor fit for market-driven systems.

The poor fit becomes apparent as electricity’s complexity has required the creation of additional multiple market structures. Even so, these markets often fail to ensure reliability during high-demand or extreme conditions. Below are additional key markets and their roles:

• Capacity Market: Ensures sufficient generation capacity is available to meet future peak demand, particularly during extreme events. Generators are paid to maintain plants on standby, but payments often fall short of incentivizing enough dispatchable resources to handle extreme conditions reliably.

• Ancillary Services Market (services ensuring grid stability): Provides critical grid stability functions, such as voltage support and frequency regulation, which renewables like wind and solar rarely contribute. These essential services increase costs as utilities procure them from traditional generators.

• Day-Ahead Market: Allows generators to bid for supplying power the next day based on forecasted demand. While efficient for planning, it struggles to adapt to unexpected renewable shortfalls, leaving grids vulnerable to price spikes.

• Intraday Market: Enables real-time adjustments to power supply within the same day. It helps address short-term renewable variability but cannot ensure reliability during prolonged extreme events, such as multi-day storms or heatwaves.

• Financial Transmission Rights (FTR) Market (Financial tools to manage grid congestion costs): Allows participants to hedge against price differences caused by grid congestion. While useful for financial planning, FTRs do not directly enhance reliability or address the physical shortages during critical events.

• Demand Response Market: Pays consumers to reduce usage during peak times, aiming to ease grid stress. However, its impact is limited during extreme events when demand remains inelastic, and widespread participation is challenging.

• Renewable Energy Certificate (REC) Market: Enables trading of credits for renewable generation to meet regulatory mandates. While promoting green energy, RECs inflate the perceived cost-effectiveness of renewables by masking their reliance on backup systems.

• Reserve Market: Ensures backup power is available for unexpected outages or demand spikes. These reserves are critical, but increase costs, as dispatchable plants must be kept online despite infrequent use.

• Bilateral Contracts and Power Purchase Agreements (PPAs): Long-term contracts between utilities and generators to secure stable supply. While offering some reliability, they often prioritize renewables, leaving gaps when intermittent sources falter.

• Emissions Markets: Trade carbon credits to incentivize low-emission generation. These markets raise costs for fossil fuel plants, indirectly increasing reliance on renewables and exacerbating the need for costly backup.

Overall, these complex market structures unfortunately tend to prioritize short-term efficiency over long-term reliability. As Part 1 showed, electricity is easy to provide most of the time but challenging during rare, high-cost periods. By focusing on real-time pricing, power markets fail to secure sufficient dispatchable resources, amplifying renewable costs and leaving markets ill-equipped to handle peak shortages or extreme weather, as explored below.

Power markets prioritize short-term economic efficiency, selecting the cheapest resources—like wind and solar—during periods of low demand or high renewable output. However, this focus fails to incentivize long-term investments in reliability, such as maintaining dispatchable plants (e.g., natural gas or nuclear) or building sufficient backup capacity. As a result, during fat tail events—when demand spikes or renewables falter—markets struggle to ensure supply, leading to price spikes and higher costs for consumers.

For example, in regions like Texas (ERCOT) or California, power markets have seen price spikes during extreme weather (e.g., Winter Storm Uri in 2021 or California’s 2020 heatwaves). These events exposed the fragility of systems reliant on intermittent renewables without adequate dispatchable capacity. During Winter Storm Uri, Texas consumers faced $10 billion in additional costs over a few days due to market price spikes. The resulting costs were passed to consumers. In contrast, regulated utilities can prioritize long-term reliability by maintaining diverse generation portfolios. Markets deem these costs inefficiencies, but regulated utilities view them as prudent reliability investments.

At the other extreme, power markets undervalue the “reliability services” provided by dispatchable plants, such as voltage support, frequency regulation, and ramping capability. Wind and solar, while cheap to operate, contribute little to these services, forcing utilities to procure them elsewhere at additional cost. This hidden subsidy for renewables further distorts market signals, making intermittent resources appear cheaper than they are…

Having a market which grants wind and solar a high percentage of wins, makes it hard for more dependable resources to survive and be available for peak needs…

[L]ook globally, and the pattern is unmistakable: regions with high renewable penetration often face higher electricity prices. Germany, with its aggressive Energiewende, has some of the highest retail electricity rates in Europe, despite abundant wind and solar. Germany’s residential electricity prices reached €0.40/kWh in 2024, among the highest in Europe, despite heavy renewable investment.

California’s rates have risen steadily as its renewable portfolio grows. In contrast, regions, like France, with balanced mixes, including nuclear and natural gas, often maintain lower and more stable prices. Power markets’ short-term focus exacerbates cost increases by neglecting reliability during high-cost events…

In the late 1990s and early 2000s, combined cycle plants driven by natural gas enabled new additions to reduce average energy costs. As a utilities’ system load grew, this would work to lower costs. When industries came to the utilities with big loads, all consumers would benefit as new combined cycles were added to the mix to serve the extra load.

The policy changes that allowed industry to shop for power enabled them to capture the benefits from the low-cost additions instead of sharing with all customers. This appeal to “market choice” had little impact on overall efficiency, merely redistributing cost benefits.

Undoubtedly, this supported new industrial growth, but it increased costs for existing industrial, commercial, and residential customers. If new generation additions were costlier, industries would likely have stayed with utility rates, leveraging the cheaper existing base while existing customers bore most of the new costs.

Subsidizing new industry may be a social good, but it’s critical to recognize that market choice didn’t reduce overall costs—it only changed who benefited, reshaping how the pie was divided. This example underscores how power markets can create the illusion of cost savings while failing to address system-wide costs, much like markets today obscure the overall cost impacts of wind and solar.

Editor's Note: I suggest the problem is not the markets, but the fact they’re not remotely close to being free markets, and are distorted beyond recogniition by curtailments, subsidies, RECs, and dozens of other attempts to bias the market toward renewables or compensate for there negative impacts on reliability and stability. Solar and wind could not compete without the special benefits they receive.. That they do receive these favors makes a mockery of the idea that there is a real marketplace. Such a market would be ideal, but we don’t have it. We only have the pretense of a true market and that's the problem. End all energy subsidies!

#Solar #Electricity #Markets #Solar #Wind #JudithCurry #RussSchussler #Costs #Utilities #Grid