Complexity versus Simplification in Electricity Markets

As US RTO markets have evolved over the last decade, they have become increasingly complex in their representations of network and security constraints, the numbers and types of ancillary services, the internal constraints of generation and demand bidders, and the array of financial products, such as finan- cial transmission rights. Meanwhile, most European markets have opted to retain simple structures, such as one-part bids, zonal or copper-plate pricing, and separate (or non-existent) markets for ancillary serv- ices. Does greater fidelity to physical constraints increase or decrease market transparency, efficiency, and access? Do they multiply or reduce gaming opportunities, as in the recent JP Morgan case? Does adding more products, such as short-run flexiramp or long-run flexible capacity markets, with finer geographic texture serve the goals of reducing costs to consumers and enhancing reliability? When do incremental market enhancements cumulate to the point that the design should be evaluated and rethought from top to bottom? The panel is in part inspired by the lively controversy over the recent blog by Prof. James Bushnell on the topic; the blog and the many responses can be found at http://energy- athaas.wordpress.com/2013/08/12/jp-morgan-and-market-complexity/