Reliability Options in Renewables-Dominated Electricity Markets
The School of Economics and Finance invites you to a seminar by Associate Professor Shaun McRae from ITAM in Mexico City.
Authors: Shaun McRae and Frank Wolak
Abstract
Capacity mechanisms are an increasingly popular tool for ensuring that demand can be met as electricity systems decarbonize. We study one such mechanism—reliability options—and show that its interaction with fixed-price forward contracts for energy creates economic incentives that undermine the policy's objective. We develop a stylized model of generator behavior under reliability options. Large generators can trigger the option exercise, weakening the short-term incentive to sell output provided by forward contracts alone. More strikingly, hydro generators respond to reliability options by selling more forward contracts and storing less water, reducing system reliability in exactly the states of the world the mechanism is meant to protect against. We show empirically that Colombian generators respond to these incentives.
About Speaker
Shaun McRae is an Associate Professor of Economics in the Centro de Investigación Económica at ITAM in Mexico City and is currently on sabbatical as a visiting researcher at the University of Auckland. His research examines how the regulation of wholesale and retail energy markets affects firms and consumers. His recent work includes studies of retail tariff design, metering adoption, and air conditioning usage in Colombia; financial transmission rights and retail competition in the New Zealand electricity market; and firm behaviour in retail gasoline markets in Mexico. He holds a Ph.D. in Economics from Stanford University.