Part 3 of this series examines power markets, promoted by policymakers (FERC) and industry advocates to lower costs through competitive bidding and merit-order dispatch. -
From Climate Etc. While markets can optimize resource allocation in many sectors, they
struggle to deliver affordability and reliability in electricity systems dominated by intermittent renewables. This post first explains how power markets operate, then highlights their challenges, and finally explores
why they amplify the cost challenges associated with wind and solar.- In Part 1 of this series, we explored how the fat tail problem undermines the cost-saving potential of wind and solar. It’s easy to supply electricity most of the time. The fat tail occurs in the rarer periods of maximal demands, when wind and solar are not available. These periods, not savings during easy times, drive system economics.
- Part 2 discussed how rate structures distort perceptions of affordability for solar applications.
How Power Markets Work (and Fail)
Power markets use a merit-order dispatch system, where generators bid their costs, and the market sets prices based on the most expensive unit needed. During “easy” times—when demand is low or renewable output is high—wind and solar often dominate.
Their near-zero marginal costs (no fuel expenses) allow them to bid low, displacing higher-cost fossil fuel plants and driving down market prices.
This creates the appearance of cheap electricity and fuels the narrative that renewables are inherently cost-effective...