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New Studies Address Misperceptions about Electricity Markets
With debates on retail competition brewing in several states, three studies that support retail competition by addressing key misconceptions around electricity market structuring were released in early March. The studies, authored by industry experts, were featured in communications released by the COMPETE Coalition, a national advocacy coalition of electricity stakeholders who support policies that promote reliable, low-cost electric power through competitive electricity markets.
In one study, Single Clearing Price in Electricity Markets, by Ross Baldick of The University of Texas at Austin, the author concludes that electricity markets should maintain the single price rule that is standard in organized markets in the United States. Using an alternative to the single clearing price, in which sellers are paid their bid price rather than the auction’s clearing price, would impair the efficient dispatch of generation and make it more difficult to police against the exercise of market power. In addition, the study rejected unsupported arguments that pay-as-bid would result in lower electricity prices. Click here to read the full report
In another study, Market Misperceptions and Regrets about Past Business Decisions, by Dr. Roy Shanker, a long-time expert consultant in the electric utility sector, the author concludes that many of the criticisms of electricity markets today are based on past bad business decisions rather than real analysis of wholesale electricity market design. The paper was based in part on a written and oral statement Dr. Shanker presented to the Pennsylvania Public Utility Commission in December 2008 and therefore examined PJM Interconnection’s Reliability Pricing Model (RPM) as an example of a market-based mechanism that not only attracts new supply and demand response resources but also retains the existing capacity needed to ensure long-term reliability. He also cited PJM’s open, single clearing price market as transparent, competitive and consistent with bilateral contracts—one in which suppliers have an incentive to offer energy at their short-run, variable or marginal costs. Click here to read the full report.
A third study, Contracting and Investment: A Cross-Industry Assessment, by Robert Stoddard of CRA International, a leading global consulting firm, addressed the misperceptions about the role of long-term contracts in incentivizing capital investments. In the report, the author concludes that you can get capital-intensive infrastructure investment spent without long-term contracts, provided that you have fair and robust markets for commodity-like products. Stoddard’s study addresses the arguments for and against long-term contracting by examining the need for long-term contracts, or lack thereof, between producers and end-use customers in several industries. The examination concludes that these contracts are not essential to assuring orderly investment in industries that resemble electric power generation. Click here to read the full report.
For more information from the COMPETE Coalition, click here.
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