Monday, April 3, 2017

Finance: Price Caps on Wholesale Electricity Markets Constrain New Power Projects

Missing Money (Energy Institute at Haas)

by Severin Borenstein, E.T. Grether Professor of Business Administration and Public Policy at the Haas School of Business

If you work in electricity markets and someone mentions “missing money,” it doesn’t make you think of a lost wallet or a sticky-fingered bank teller. Instead it evokes regulatory policies that lower the revenues electric generation companies can make in wholesale markets. Missing money is more than just a concern of corporate CEOs and shareholders. It could soon be a serious impediment to a low-carbon economy.

Money has been going missing for many years, according to owners of power plants.  They’ve used the term for more than a decade to refer to the fact that wholesale electricity markets have price caps (mostly between $1,000 and $10,000 per MWh) that constrain how much sellers can make when supply is tight. Without that income, generators argue, it may not be profitable to build new capacity, or extend the life of existing capacity, that is needed to meet demand.

(Thanks to GRC Member Marcelo Lippmann, Staff Scientist (retired) at Lawrence Berkeley National Laboratory for the submission.)

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