Thread by @TheEnergyCraig

Why I think energy-only markets will not work in a changing climate: (1) they assume rational actors with perfect information and (2) the limits on letting the market reflect real scarcity pricing will likely only get worse.

(1) The underlying premise - profit-maximizing gencos will have a strong incentive to invest given scarcity pricing. As @JesseJenkins pointed out - every gas plant offline wishes they were online. They would have printed $$$ the past few days.

Setting aside TX now & looking more broadly, this would require each genco to grapple w/ changing weather and update their priors regarding the frequency and severity of extreme events (and price spikes).

At the same time, they would need to weigh shifting probabilistic distributions against certain costs for upgrades, weatherization, etc. Risk aversion + shifting probabilities + bias to present returns = a bad combo that does not give me hope for smart adaptation.

Finally, many have pointed out the interconnected infrastructure. Maybe the market can figure this out, but I think we are already asking for a lot - asking for a wider aperture is an even heavier lift that, I think, requires coordination.

(2) Systems all over set artificial price caps. If I have not butchered Ignacio's lessons, power market 101 says let prices reach the VOLL. $9000, I think it's safe to say, is not reflective of the VOLL.

As @alexdaviscmu @BDLeibowicz @claytonpbarrows @parth_PIT & others have pointed out, VOLL is not a fixed quantity. It will significantly increase with longer duration and more widespread outages, when monetary AND non-monetary costs worsen.

So an already-artificial limit becomes even more woefully inadequate to send the correct market signal. Worsening climate -> worsening extremes -> worsening outages will widen the disconnect imposed by artificial price caps.

At least with a capacity market, you can some centralized decision-making exerted that can grapple with climatic uncertainty, societal goals and preferences, etc. Of course this is not perfect either - but seeming increasingly like the lesser of 2 evils to me.