The Role of Efficient Pricing in Enabling a Low-Carbon Electricity Sector

Abstract

Producers and consumers will make the investments and innovations necessary to transition to a low carbon electricity supply industry only if they are compensated for their efforts. In the absence of explicit government support for these activities, this outcome will occur only if wholesale and retail prices provide this compensation. Efficient wholesale and retail pricing provides compensation for the cost-effective deployment of these innovations. Multi-settlement locational marginal pricing markets set efficient short-term wholesale electricity prices. Marginal cost-based pricing of transmission and distribution networks is increasingly important in regions with solar resources. More efficient wholesale and retail pricing implies significantly greater price volatility, particularly as the share of intermittent renewable generation increases, which requires implementing a number of competition and regulatory safeguards to protect consumers, while still providing the price signals necessary for a least cost transition to a low-carbon electricity supply industry.