The Polar Vortex: Implications for Improving the Efficiency of Wholesale Electricity Spot Market Pricing

Extreme cold weather driven by a polar vortex in early January 2014 provided a stress test for Mid-Atlantic and Northeastern wholesale electricity market designs and revealed two particular electricity spot market pricing inefficiencies which can negatively impact operations and reliability. First, the polar vortex illuminated the ongoing problem where uneconomic out-of-market resource compensation (“uplift”) puts downward pressure on electricity spot market prices. Second, price caps may have suppressed wholesale electricity market prices below competitive levels. That is, offer and price caps were demonstrably below input costs, and could have prevented spot market clearing prices from reflecting the actual value of electricity supply to the wholesale market. In this paper, Joseph Cavicchi explains the importance of working diligently to resolve ongoing electricity spot market design shortcomings and clearly signal to market participants that electricity spot market pricing will not be distorted by potentially binding price caps and unnecessary uplift.

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