UMD Doctoral Student Examines Challenges Facing the Decarbonization of Wholesale Electricity Markets

Research suggests that energy storage technologies and appropriate pricing and capacity policies are key to the future of renewable carbon-free energy

Wind turbines in Sweetwater, Texas

Image Credit: Matthew T. Rader

April 13, 2021 Samantha Watters

Christopher Holt, doctoral candidate with Agricultural and Resource Economics (AREC) at the University of Maryland (UMD), completed a summer fellowship with the Environmental Defense Fund (EDF) that led to a deep examination of the challenges facing wholesale electricity markets, particularly with the policy goals of decarbonization in mind. Decarbonizing electricity is an impactful goal given that the Environmental Protection Agency identifies electricity as one of the largest sources of carbon emissions in the United States (27% of our total emissions), second only to transportation (28%). In his recent paper published as part of the Environmental Defense Fund Economics Discussion Paper Series, Holt dives into the hurdles ahead to decarbonize wholesale electricity markets, suggesting that energy storage technologies and appropriate policies are key to the future of renewable carbon-free energy. 

“Getting to some level of decarbonization in electricity markets is very straightforward,” explains Holt. “With the right policy incentives in place, reducing emissions is natural because the economics of low-cost renewable energy technologies are favorable. But then getting from say 50% decarbonized to 100% is going to be much more difficult without storage at a utility scale, which right now isn’t economically feasible. A lot of times, energy consumption ramps up when these intermittent renewable systems ramp down [for example, at night when solar is no longer actively producing energy], and right now the main way to supplement those systems is through natural gas. Wind and solar are essentially free after the upfront investment, but the challenge is really scaling and making sure we can store energy so that it is usable in the off hours of their production.” 

Holt is focusing his work specifically on wholesale electricity markets, with an emphasis on how power generators compete with each other to sell electricity in wholesale markets with larger energy needs. Many parts of the country have what are called capacity markets, setting a target for how much power generation is needed and building additional plants as needed based on those targets. Holt was connected with a team at EDF in New York City to work on these issues, participating in the large non-profit’s first predoctoral fellowship in this field. 

“Working with Kristina Mohlin, a senior economist at EDF, we thought it would be useful to identify areas of research needed in this rapidly evolving field with so many changes going on in electricity markets,” says Holt. “My job was to keep tabs on developments in wholesale electricity market design, so I ended up going to a lot of workshops, talking to a lot of economists and other experts to get a feel for what the interesting questions were. What are policymakers scratching their heads over, and how can economic research help?”

In his new paper, Holt was able to break down these important research avenues into short term and long term considerations. Energy storage came out as a key concern, as did instituting price-responsive demand and capacity market policies in the context of decarbonization. The design of these markets and what will work best as energy is increasingly decarbonized is still unknown and a hot issue for environmental economics research. 

“Economists have always favored the idea of assigning a price to pollution, in this case carbon emissions,” explains Holt. “So there are a lot of economists who would favor a carbon tax, which is elegant and simple, and is easy to administer. But that just means that generators have to pay a certain price for the carbon they emit. We haven’t had that in the U.S., but we have regional cap and trade policies that involve putting a cap on emissions and then allowing firms to trade permits to pollute at whatever the market price becomes. Federal Production Tax Credits and state standards for renewables are less talked about but are other instruments that have had a big impact, however, to incentivize renewable energy production.” 

Renewable energy continues to spring up all across the country due to these policies (including in Maryland), and because in some cases as Holt explains, it is just cheaper to do than other forms of electricity production if the location is right. This has been the case in Texas, for example, which now has more than 20% of their power coming from wind. Holt is studying Texas’ unique electricity market design for his dissertation work. 

 “The devastating storm that occurred about a month ago really focused a lot of media attention on Texas and its differences as an energy market,” says Holt. “It is on its own stand-alone grid separate from the rest of the country, and has what’s called an energy-only design, which means they rely simply on the price of the electricity to be the signal that causes firms to build new power plants. This design involves a scarcity price that kicks on when supply is tight, and is allowed to increase to a very high level. When prices are high, it offers an incentive for energy suppliers to produce more electricity and ultimately build more power plants. It has been a big point of debate whether that has been a sufficient incentive, however. The recent crisis is less about having a sufficient amount of overall capacity and more about how to ensure reliability in the face of extreme weather events.” 

Holt hopes his work can continue to unpack complex issues in wholesale energy production like these, while also helping in the fight against climate change. “My focus is the intersection of industrial organization and environmental economics,” says Holt. “I like looking at how firms respond to environmental policies. Since 2008 when Obama and McCain were debating federal cap and trade programs, I’ve been really interested in the economics of climate change policy. I also worked in economic consulting for several years focusing on issues pertaining to market competitiveness, so when I decided to pursue my PhD, it made sense to me to blend the two together and focus on environmental policy and market power. It’s been nice to return to the environmental work, and working with Josh Linn [associate professor and advisor to Holt] and other faculty and students in AREC has been a great experience.”

This paper, entitled “Wholesale Electricity Market Design for Decarbonization: Research Opportunities,” is published in the Environmental Defense Fund Economics Discussion Paper Series, DOI: 10.2139/ssrn.3701938.