Electricity Price Distributions in Future Renewables-Dominant Power Grids and Policy Implications

Dharik S. Mallapragada, Cristian Junge, Cathy Wang, Hannes Pfeifenberger, Paul L. Joskow, and Richard Schmalensee,

November 2021

Future electricity systems with constraints on carbon emissions will rely more on wind and solar generation, with zero marginal cost, than today. We use capacity expansion modelling of Texas in 2050 to illustrate wholesale price distributions in future energy-only, carbon-constrained grids without price caps under a range of technology/system assumptions. Tightening carbon emissions constraints dramatically increases the frequency of very low prices. The frequency of high prices also increases, and all resources earn the bulk of their energy market revenues in relatively few hours. The presence of demand response, long-duration energy storage, dispatchable low-carbon generation, or a robust market for hydrogen for non-electricity use (and for energy storage) weakens but does not undo these results. To encourage economy-wide electrification, the marginal retail price of electricity should be low when the wholesale spot price is low. We discuss ways of reducing consumers’ risk in this world while providing adequate investment incentives.

Keywords: storage, decarbonization, price distributions, electricity, wind generation, solar generation, renewables

JEL Codes: L11, L51, L94, Q41, Q42, Q49