Market Solutions to Reliability Challenges in Electricity Markets (Frank Wolak, Program on Energy & Sustainable Development, Stanford University)

“The reliability externality [means] that if there is inadequate capacity to meet demand because of something I did, that cost … gets shared by everyone.  As a consequence, everybody has an incentive to underinvest in [reserves].”

“Texas allows prices to go very high to provide an incentive to invest in reserves.  Other parts of the world don’t have that same sort of belief in markets.  So you need some sort of regulatory mandate that you purchase [reserves] in advance.”

“California has the ideal conditions for battery investments to make economic sense. The other side of that is that those investments look a lot better if they are made in the distribution grid.”

Frank A. Wolak is the Holbrook Working Professor of Commodity Price Studies in the Department of Economics at Stanford University, and directs the Program on Energy and Sustainable Development (PESD) in the Freeman-Spogli Institute (FSI) for International Studies. His work studies methods for introducing competition into infrastructure industries — telecommunications, electricity, water delivery and postal delivery services — and on assessing the impacts of these competition policies on consumer and producer welfare.