Completing Market Structures for Electricity: A Return to Basics Richard E. Schuler Cornell University Workshop on Demand Response Products MLK “Holiday” Ithaca, NY

Dimensions of a Market Product Attributes (for Electricity) - Energy Flow - At the Flip of a Switch - “Public Good” Aspects Principle: Need as many instruments as objectives! Space Time

Key Factors That Affect Market Design  All Markets are Discrete  Balance Four Factors: 1.Equating MB and MC of Participants 2.Transactions (Decision-Making) Costs 3.Cost of Arbitrage (Across Boundaries) 4.Market Size and Market Power + Basic Assumption: All Parties Have and Can React to Full Information!

So What Should Be the Primary Requirement for a “Smart” Grid? Answer: Real-Time Meters and Real-Time Pricing !

Early Cornell Experiments: FP-DRP-RTP RTP more efficient RTP curbs price spikes Line Flow Volatility Lower w/ RTP Participants Prefer RTP - - After Trying It!

Significant Reversal of Preferences

Implied Line and Generation Capacity Requirements by Market Treatment: Simulated Results

Additional Market Enhancements: Two-P art Prices - Energy - Capacity (with market cleared based on least-cost combination) Forward Markets (Physical and Financial)

Two-Part Prices (# instruments = # objectives)

But - - Let’s Get RTP Done First!