Chiara Lo Prete, associate professor of energy economics in Penn State’s College of Earth and Mineral Sciences, received a Faculty Early Career Development Program (CAREER) award from the National Science Foundation to investigate electricity market structures to provide efficient incentives for generation capacity investment under increasing renewable penetration.
Organized wholesale electricity markets in the United States converged to a common market design framework that has been successful at promoting efficient and reliable operations of electric power systems since the 1990s. However, the growth of intermittent renewables poses challenges that were unknown, or less material, in the early design efforts. In particular, energy prices alone are unlikely to provide incentives for investment in sufficient generating capacity or promote the right mix of conventional and renewable energy sources. This “missing money” problem is exacerbated by increasing renewable generation, as lower (on average) and more volatile energy prices may discourage new investment in generation capacity.
Grid operators in the United States currently use a variety of approaches to mitigate issues of revenue sufficiency. All regional transmission organizations (RTOs) instituted various forms of scarcity pricing, which allows energy and ancillary service prices to rise above the average variable cost of operating plants when the system is capacity constrained. In PJM Interconnection, the RTO that coordinates the movement of electricity in all or parts of 13 states including Pennsylvania, generation units earn revenue for capacity, in addition to energy and ancillary services. These approaches have been able to support investment in new generation capacity over the last 20 years, but there is no consensus as to which one may provide efficient incentives in the appropriate generation mix, as intermittent renewables grow in the system.
“Increasing levels of renewable generation induce a decrease in energy prices and utilization of traditional power generation technologies, eroding revenue streams from the energy market and shifting a greater proportion of returns for cost recovery to the capacity market, if one exists,” Lo Prete said. “As a result, further reliance on markets and incentives other than energy and capacity markets may become necessary to ensure that generation resources needed for long-term reliability remain financially viable.”
Lo Prete’s group will examine this market design challenge associated with increasing renewable penetration using an approach that combines optimization and experimental economic methods. First, the research team will develop multi-stage equilibrium models to simulate investment and operation decisions in electricity markets under alternate designs for resource adequacy and revenue sufficiency. Second, the researchers will design and conduct human subject experiments to compare performance characteristics of market designs. Contrasting model predictions with outcomes from the experimental markets will offer insight into real-world market design.
“The laboratory is an ideal environment to evaluate market designs under conditions that we can control, providing an opportunity to gather evidence on the relative strengths and weaknesses of each design, examine human decisions in settings that reflect salient market features and develop modifications at a relatively low cost before implementation in the field,” Lo Prete said.
Lo Prete said the expected project outcomes have the potential to advance understanding of efficiency gains associated with electricity market designs, contribute to sharper answers on the most efficient path forward to integrate renewables, and help shape future market design decisions. Ongoing collaboration with regional electricity markets will facilitate dissemination of research findings and implementation of promising market design innovations.
The research component of the proposal is closely integrated with the proposed educational activities, which address two urgent challenges in STEM fields. First, Lo Prete will explore methods to recruit and engage female undergraduate students in research. For example, she will work with undergraduate students on the creation of short videos explaining key terms in energy markets. Funds from the NSF will also be used to establish a scholarship program, WEEE R (Women Engaging in Electricity Economics Research), with the aim to broaden female student participation in Lo Prete’s research group and encourage their interest in pursuing advanced degrees in economics and STEM disciplines.
“These efforts are inspired by the deep commitment to advancing women in research and academia shown by Dr. Carl Heath, who for many years has supported first-year engineering doctoral students (like myself) at Johns Hopkins University,” Lo Prete said.
The second challenge addressed by her educational plan relates to the need to develop materials and skills for explaining the operations of electricity markets, which are complex institutions combining economic principles with the physics of electric delivery. To this end, Lo Prete proposes a range of activities to train young scholars to become effective communicators and make their work accessible to a broad audience. For example, she plans on integrating science communication training into a new graduate-level course in the John and Willie Leone Department of Energy and Mineral Engineering.