Why “cheaper” wind and solar raise costs. Part III: The problem with power markets
Posted on May 28, 2025 by curryja | 907 Comments
by Planning Engineer (Russ Schussler)
Part 3 of this series examines power markets, promoted by policymakers (FERC) and industry advocates to lower costs through competitive bidding and merit-order dispatch. While markets can optimize resource allocation in many sectors, they struggle to deliver affordability and reliability in electricity systems dominated by intermittent renewables. This post first explains how power markets operate, then highlights their challenges, and finally explores why they amplify the cost challenges associated with wind and solar.
In Part 1 of this series, we explored how the fat tail problem undermines the cost-saving potential of wind and solar. It’s easy to supply electricity most of the time. The fat tail occurs in the rarer periods of maximal demands, when wind and solar are not available. These periods, not savings during easy times, drive system economics. Part 2 discussed how rate structures distort perceptions of affordability for solar applications.
How Power Markets Work (and Fail)
Power markets use a merit-order dispatch system, where generators bid their costs, and the market sets prices based on the most expensive unit needed. During “easy” times—when demand is low or renewable output is high—wind and solar often dominate. Their near-zero marginal costs (no fuel expenses) allow them to bid low, displacing higher-cost fossil fuel plants and driving down market prices. This creates the appearance of cheap electricity and fuels the narrative that renewables are inherently cost-effective.
However, during peak or extreme conditions, wind and solar often underperform due to weather or diurnal constraints. For example, wind speeds may drop during heatwaves, or solar output may be negligible at night or during cloudy winters. When demand spikes or renewables falter, markets rely on dispatchable resources—combined cycle plants, combustion turbines, or even older coal units—to meet the shortfall. These resources have higher marginal costs and are often called upon during the most expensive hours, driving market prices skyward. During Winter Storm Uri in February 2021, ERCOT prices surged to $9,000/MWh as renewables underperformed and demand soared. As discussed in the first posting, doing well most of the time is not enough. The challenge in providing costly backup during peak shortages exposes the limitations of power markets, as explored below.
The Promise and Limits of Power Markets
I am a big fan, in general, of markets over central planning and the wonders of the Invisible Hand. Markets are powerful tools for aligning supply and demand, often outperforming centralized planning by incentivizing competition and innovation. However, it should be understood that markets do not work well for every good and service at every time and place.
Listed below are conditions which increase the likelihood of markets being superior to centralized planning:
https://judithcurry.com/2025/05/28/why-cheaper-wind-and-solar-raise-costs-part-iii-the-problem-with-power-markets/
