The Economics of Power System Transitions
Total power system capacity in 2050 is predicted to be 69 percent larger than today, and total generation is predicted to be 36 percent larger than today. The share of renewables (other than hydroelectricity) will increase from 16 to 43 percent of capacity. In future power systems dominated by variable renewable energy (VRE), intermittent generation will create challenges for the provision of reliable electricity supplies. A broader energy system transition will require changes to the way in which electricity is demanded and supplied, and at a pace much faster than has occurred historically.
Projections typically simulate cost-minimizing technology portfolios that satisfy electricity demand subject to clean energy goals under “average” conditions. This ignores the need for additional investments or market structures that can maintain the future system’s reliability at different levels under a broad range of conditions. In regulated markets, current integrated resource planning does not account for trends underway on the demand side that predict significant growth in consumers’ electricity demand, nor does such planning consider future changes in how electricity is consumed or in consumers’ demand for reliability. Going forward, greater integration and engagement with the demand side by planners is essential.
In future power systems dominated by variable renewable energy (VRE), intermittent generation will create challenges for the provision of reliable electricity supplies. Insufficient capacity online or ramping capability would prevent the power system from responding to rapid fluctuations in demand and renewable output. Pervasive 100 percent reliability will likely be costly and inefficient, as this would require having excess capacity online all the time in case it is needed. Uniform and universal reliability lead to inefficiency that arises because of heterogeneous preferences; some consumers will insist on 100 percent reliable electricity, whereas others will likely be willing to forgo reliability for a lower cost. Proposals for electricity market designs to address this issue date back to at least the 1980s. Such designs to address inefficiencies owed to heterogeneous preferences could be especially welfare-improving in future high-VRE power systems, as they could reduce the need for expensive backup dispatchable generation and storage to meet electricity demand when the wind isn’t blowing or the sun isn’t shining. In this article, we highlight the need for the implementation of more efficient electricity market designs that provide reliability and cleaner energy and that reflect heterogeneous consumer demands and preferences for reliability.