CAREER: Capacity Adequacy Options for Electricity Markets with Increasing Renewable Penetration: Equilibrium Models and Laboratory Experiments

Organized wholesale electricity markets are complex institutions combining economic principles with the physics of electric delivery. These markets converged to a common framework that has been successful at promoting efficient and reliable operations since the 1990s. However, the growth of intermittent renewables poses challenges that were unknown, or less material, in the early designs. As electricity markets evolve to integrate renewable generation into power systems, there is a need for robust models and analysis tools to help decision-makers in the design effort. Market complexity is often not adequately represented in models aimed at informing design decisions, and comparisons between electricity market structures are difficult. The research objective of this CAREER proposal is to develop a unifying conceptual and computational framework to compare wholesale electricity market designs on their ability to provide efficient incentives for generation capacity investment under increasing renewable penetration. Results will 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 educational objective of this CAREER proposal is to provide research opportunities that engage female undergraduate students in the PI's research group and encourage their interest in pursuing advanced degrees, and integrate science communication training into undergraduate and graduate education. These objectives are well aligned with the PI's long-term educational goals of broadening participation of women in research careers in energy economics and engineering, and educating the next generation of energy scholars and professionals.

The proposed research examines a market design challenge associated with renewable integration into electricity systems, using a unique approach that combines equilibrium models and experimental economic methods. First, the PI will develop multi-stage equilibrium models to simulate investment and operation decisions in electricity markets under alternate designs for resource adequacy and revenue sufficiency. Equilibrium models will: i) account for the impact of uncertainty in renewable production, demand and fuel prices on investment decisions; ii) span a multi-year time frame to consider investment and retirement decisions; iii) incorporate risk-averse investment in generation capacity and imperfect competition in energy markets. Models of the type discussed in this proposal are characterized by non-convexities that pose challenges to established solution techniques. To handle computational complexity, the PI will leverage recent algorithmic advances for computing equilibria of non-cooperative games under uncertainty. Second, the PI will design and conduct human subject experiments to compare performance characteristics of market designs. The laboratory is an ideal environment to evaluate market structures under controlled conditions, providing an opportunity to gather evidence on the relative strengths and weaknesses of each design, and examine human decisions in economic environments that reflect salient features of the naturally occurring markets. Thus, experiments may serve as a valuable complement to equilibrium models in the design effort. Predictions from the equilibrium models will be compared to outcomes from the experimental markets to provide insights into real-world market design.

This award reflects NSF's statutory mission and has been deemed worthy of support through evaluation using the Foundation's intellectual merit and broader impacts review criteria.