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Energy Market Design

Paper Session

Saturday, Jan. 6, 2024 8:00 AM - 10:00 AM (CST)

Convention Center, 225A
Hosted By: International Association for Energy Economics
  • Chair: Greg Upton, Louisiana State University

Wind Intermittency and Supply-Demand Imbalance: Evidence from U.S. Regional Power Markets

Matthew Oliver
Georgia Institute of Technology
Victoria Godwin
Georgia Institute of Technology


This paper empirically estimates the relationship between wind intermittency and a widely used measure of electricity system imbalance known as ‘area control error’ (ACE). ACE is a measure of the total, system-wide energy imbalance at any given moment in time, taking into account the effects of such imbalances on system frequency.

Induced Innovation, Inventors, and the Energy Transition

Todd Gerarden
Cornell University
Eugenie Dugoua
London School of Economics


We study how individual inventors respond to incentives to work on “clean” electricity technologies. Using natural gas price variation, we estimate output and entry elasticities of inventors and measure the medium-term impacts of a price increase mirroring the social cost of carbon. We find that the induced clean innovation response primarily comes from existing clean inventors. New inventors are less responsive on the margin than their average contribution to clean energy patenting would indicate. Our findings suggest a role for policy to increase the supply of clean inventors to help mitigate climate change.

Electricity Pricing and the Energy Transition for Commercial and Industrial Consumers

Shaun McRae
Mexico Autonomous Institute of Technology
Frank Wolak
Stanford University


In many middle-income countries, high electricity prices for non-residential users are used to subsidize low prices for residential users. This tariff structure discourages efforts to decarbonize through electrification in the manufacturing sector. In this paper, we study the effects of a 2012 policy in Colombia that exempted industrial electricity users from a 20 percent tax. The exemption is not automatic, and we show that take-up is low and possibly driven by unexpected increases in electricity bills. We find a small but persistent increase in consumption after firms receive the exemption. We explore implications of these results for future tariff reforms designed to encourage greater electricity use.

Prospects for Markets for Internationally Transferred Mitigation Outcomes under the Paris Agreement

Jon Strand
World Bank


The Paris Agreement provides for parties to use Internationally Transferred Mitigation Outcomes (ITMOs) for implementing their Nationally Determined Contributions (NDCs). This paper analyzes spot, forward and options market trading of ITMOs given two forms of uncertainty: (1) about the fulfillment of parties’ NDC targets, and (2) about the existence and functioning of the ITMO markets, due in part to banking of ITMOs beyond 2030 not being allowed. Closed-form solutions are derived for trading of options and its welfare impacts given uniform distributions of parties’ uncertainties about fulfilling their individual commitments. Access to call options for late ITMO purchases leads to larger forward ITMO sales or less current mitigation, help parties stay in NDC compliance at the Paris Agreement end point, brings early revenue to low-income parties, and is welfare enhancing for all parties. Access to put options for late ITMO sales is less important, in particular when late spot markets for ITMOs exist. The ITMO markets can be enabled by donor- provided climate finance. Effectively functioning ITMO markets can dramatically reduce the parties’ costs of achieving their NDCs, which could lead to higher ambitions of parties, and greatly reduced global greenhouse gas emissions, under the agreement.

The Microeconomic Problem with Renewable Energy

Ryan Williams
University of Paris Dauphine-PSL


The growing penetration of intermittent renewable energy sources, such as wind and solar power, poses challenges to the reliable and secure operation of power systems. Although the marginal cost of a unit of renewable electricity is seemingly much lower than that of a unit produced by burning fossil fuel, the non-linearity of the supply curve and the unpredictability of renewables mean that in practice, renewables are often economically more expensive than fossil fuels. This ultimately comes from costs associated from the need to balance supply and demand in real-time and minimise the deviations between scheduled and actual generation.
These costs are collectively known as balancing costs. They are necessary to ensure grid stability and have increased dramatically with the rise in renewable electricity generation. Electricity balancing costs play a crucial role in the efficient operation of power systems and the integration of renewable energy sources. This paper explores the microeconomics of electricity balancing costs, focusing on the factors that contribute to these costs and their implications for market participants, system operators, and policymakers.
JEL Classifications
  • Q4 - Energy
  • L9 - Industry Studies: Transportation and Utilities