Markets for low carbon, low cost electricity systems

The document analyzes how the rise of variable renewable energy (VRE) undermines current electricity market designs, which rely on short-term marginal costs often set by natural gas. It highlights risks such as zero or negative pricing and increased financing costs due to investor uncertainty. To resolve this, the authors propose splitting the system into an 'energy market' for long-term, low-risk contracts for capital-intensive resources and a 'delivery market' that uses locational marginal pricing to incentivize flexibility from batteries, demand response, and dispatchable plants.

• Current electricity markets based on short-term marginal costs may become unworkable under high VRE penetration because prices could drop to zero or below for long periods, threatening the financial viability of generation businesses.
• The current reliance on natural gas as the marginal price setter creates unnecessary risk for low-carbon investors, as their returns become volatile based on fuel prices they do not use.
• Existing market designs can paradoxically increase financing costs for renewables; as more low-cost VRE enters the market and lowers wholesale prices, the 'notional subsidy' (the gap between contract price and market price) appears larger, increasing perceived political and default risk.
• Unspecified curtailment risks, such as not paying feed-in tariffs during negative price hours, can make wind energy 'uninvestable' by increasing the required weighted average cost of capital due to higher debt risk.
• The proposed 'energy market' would use long-term auctions for commodity electricity to enable low-cost financing, potentially reducing wind and solar costs by over 10% through increased debt capacity and 15-20% via new institutional financial instruments.
• The proposed 'delivery market' would use locational marginal pricing to manage the difference between contracted energy and real-time demand, concentrating flexibility incentives on assets like batteries and demand-side response.
• A low-carbon system relying over 80% on VRE could become cost-effective without carbon pricing by 2030, potentially costing less than a new system supplied exclusively by natural gas.
• The authors cite Brazil's electricity market as a successful example of using long-term energy auctions (typically 15-30 years) to facilitate investment in new hydro generation.

APA

Pierpont, B., & Nelson, D. (2017). Markets for low carbon, low cost electricity systems. Climate Policy Initiative. https://www.climatepolicyinitiative.org/wp-content/uploads/2017/10/CPI-Markets-for-low-carbon-low-cost-electricity-systems-October-2017.pdf

Chicago

Pierpont, Brendan, and David Nelson. Markets for low carbon, low cost electricity systems. Climate Policy Initiative, 2017. https://www.climatepolicyinitiative.org/wp-content/uploads/2017/10/CPI-Markets-for-low-carbon-low-cost-electricity-systems-October-2017.pdf.

Wikipedia

{{cite report |last1=Pierpont |first1=Brendan |last2=Nelson |first2=David |title=Markets for low carbon, low cost electricity systems |publisher=Climate Policy Initiative |date=September 2017 |url=https://www.climatepolicyinitiative.org/wp-content/uploads/2017/10/CPI-Markets-for-low-carbon-low-cost-electricity-systems-October-2017.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{pierpont2017markets, author = {Pierpont, Brendan and Nelson, David}, title = {{Markets for low carbon, low cost electricity systems}}, institution = {Climate Policy Initiative}, year = {2017}, month = sep, url = {https://www.climatepolicyinitiative.org/wp-content/uploads/2017/10/CPI-Markets-for-low-carbon-low-cost-electricity-systems-October-2017.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }