CS34: Electricity Markets

I study revenue-neutral retail tariff reform in Spain's PVPC, a nationwide regime under which small consumers face hourly retail prices indexed to the wholesale market. Using an hourly national panel, I document strong wholesale-to-retail pass-through and a negative but modest short-run aggregate price--load relationship. To estimate this relationship, I use instrumental variables, with day-ahead forecasts of nation-wide wind generation as the preferred supply-side shifter. Evidence on cold-hour, adjacent-hour, and tail-state responsiveness is less stable. I then use the preferred estimate to evaluate how far hourly retail-price volatility can be smoothed under monthly revenue neutrality through flat, spread-compressed, and capped-tail tariff designs. Smoother price paths reduce bill risk, but full flattening weakens scarcity signals and worsens winter peak and emissions outcomes. The results suggest that capped-tail pricing and limited spread compression provide insurance gains with smaller system costs.

The energy transition has meant the introduction of variable and intermittent renewable generation technologies, which have posed the challenge of maintaining the security and reliability of the electricity supply. Lithium-ion batteries, through Battery Energy Storage Systems (BESS), have emerged as complementary alternatives to renewable energy by complementing the intermittency and variability of energy generation. However, this technology entails nonlinear and nonconvex storage capacity aging processes, making it difficult to study investment decisions in power system planning and operation models. This work presents a proposal for incorporating the degradation of BESS systems, through a storage capacity reduction factor, into a Mixed-Integer Linear Program (MILP) model representing the Chilean Power System Expansion Planning. Specifically, we formulate and implement a long-term power-system expansion planning model that incorporates BESS considering the impacts of BESS degradation into the investment and operation decisions. The model was implemented in the Chilean power system because of the transmission line congestion and challenges the country faces, allowing for a broader analysis of the effects of the BESS degradation. The results show that BESS degradation reduces investment in BESS systems and increases investment in transmission lines and other generation technologies such as CSP or thermal power plants, thereby increasing CO2 emissions. However, in extreme degradation scenarios, significant investment in transmission lines is observed, allowing a reduction in thermal generation investments, reducing congestion, and generating low emissions (almost at the same level as the scenarios ignoring BESS degradation). As a result of the larger investment in transmission under scenarios with deeper BESS degradation, network congestion rates are globally lower in the scenario of deep BESS degradation during the last two planning periods (2055 and 2060). In fact, in 2055, there is a similarity between the transmission congestion experienced in scenarios with and without BESS degradation.

In an electricity market without storage, generators contribute to reliability by providing power at times of peak demand relative to available capacity. These are the times at which prices in an energy-only market should be highest, and the times when "missing money" will arise if those prices are held down. However, as both the generator's contribution to reliability and its missing money are based on the same time intervals, capacity markets that credit resources in line with their reliability contributions could be effective at driving efficient investment. 
In a world with energy storage, this need not hold. It is well-known that storage units may be either power- or energy-constrained in terms of discharging, but constraints on charging can also affect their behaviour. In particular, the amount of energy available for charging between the point at which a storage unit is fully discharged and the time when it must start to discharge again may be limited. If additional generation at this time can contribute to reliability, even though prices may be relatively low, the link between missing money and reliability that capacity markets rely up on will be broken.
Suski et al (IEEE Transactions on Energy Markets, Policy and Regulation, 2026) explore this phenomenon through simulation. This paper will analyse the underlying optimisation in the spirit of Junge et al (Energy Journal, 2022) to fully characterise the possible results.
Suski et al find that capacity markets are no longer efficient in a world with energy storage and missing money. This paper will shed more light on the underlying causes of this inefficiency and start to explore alternative market mechanisms that might promote better outcomes.

A central point of the "wave" of electricity markets liberalization (1980s) was the dichotomy between centralized and decentralized decision-making. In this regard, electricity markets can follow distinct paths: cost-based markets (like Chile and Brazil) in which the independent system operator audits plants' technical and financial information, and bid-based markets (like most of North America and Europe) that adopts a decentralized logic, where agents declare their prices and conditions to the operator. While the first focuses on technical oversight, the second relies on market competition to ensure that bids reflect actual marginal generation costs.
One motivation for migrating to a bid-based mechanism is the need to represent increasingly complex systemic conditions, that the system operator cannot reliably follow. However, especially for countries used to a cost-based paradigm, concerns regarding market power and price manipulation may threaten system equilibrium. International experiences suggest that robust mitigation frameworks are essential for adequate cost allocation.
In addition to mechanisms focused on market power mitigation (market monitoring and rules to cap and validate bids), for systems with a large share of hydropower, there is a secondary concern with the possibility that generators' bids will empty the reservoirs too quickly, menacing security of supply. To this end, this research proposes a "security bid" mechanism that allows the operator to maintain some level of oversight. Combining both mitigation mechanisms is important for case studies such as Brazil, which is currently studying the possibility of implementing a bid-based market.
This study combines a qualitative benchmarking analysis with quantitative market simulations of the Brazilian system conducted via IARA, an open-source computational tool for power market analysis. Comparative results demonstrate that these mitigation strategies effectively do facilitate efficient market outcomes, producing competitive prices that reflect the physical reality of the power system under a bid-based paradigm.