Overview
For many decades, the companies that operated electricity grids had to do so with two objectives in mind: reliability (keeping the lights on) and cost (keeping electricity affordable). Despite the complexities of the electric grid, these two objectives were relatively simple to meet, in part because the regulatory system shifted a lot of the financial risk away from companies and onto ratepayers. It isn’t that hard to keep a power grid reliable by overbuilding it.
This lesson builds on the previous two objectives by adding a third to power grid operations – lowering the environmental footprint of power generation by adding large amounts of low-emissions generation resources. This is, very broadly, sometimes called the “renewable integration” challenge. The technical challenges in maintaining the balance of supply and demand are immense, but our focus is on the economic challenges, particularly in the context of electricity deregulation.
Learning Outcomes
By the end of this lesson, you should be able to:
- Define the term “Variable Energy Resource” (VER)
- Explain three reasons why large-scale power generation from VERs poses an economic challenge to the electricity industry, not just a technical challenge
- Identify the various types of ancillary services that electric system operators require to maintain reliability, and identify those that are likely to be particularly important for VER integration
- Explain capacity payments and the rationale for having separate payments for electric capacity and electric energy
- Explain how demand-side resources could participate in deregulated electricity markets
Reading Materials
There are a lot of good resources that describe the renewables integration challenge. We will lean on external readings more heavily in this lesson than in previous lessons.
- Carnegie Mellon University Scott Institute for Energy Innovation (2013). Managing Variable Energy Resources to Increased Renewable Electricity's Contribution to the Grid.
- Cardwell, D. (Aug. 15, 2013). Grappling with the Grid: Intermittent Nature of Green Power is Challenge for Utilities. New York Times.
- Reed, S. (Dec. 25, 2025). Power Prices Go Negative in Germany, a Positive for Energy Users. New York Times.
- National Energy Technology Laboratory (2013). Ancillary Services Primer. This short paper describes different types of ancillary services and how generation companies can compete to provide these ancillary services. For related, 100% optional reading, download this Power Market Primers ZIP file.
- Please watch the following video interview. If the video is slow to load on this page, you can always access it and all videos via the Media Gallery in Canvas.
The following resources are 100% optional and may not be accessible to all students.
- Hittinger, E. (2012). Chapter 4: The Effect of Variability-Mitigating Market Rules on the Operation and Deployment of Wind Farms. In Energy Storage on the Grid and the Short-term Variability of Wind. [Doctoral Dissertation, Carnegie Mellon University.] The important part of this chapter is the discussion of different renewables integration policies around the world. Note that the link goes to the entire document but that you're only looking for Chapter 4.
- Rocky Mountain Institute (n.d.). The Economics of Grid Defection. The report as a whole is worth a read, but the four-page summary captures the main points.
Video: Interview with Liz Cook (43:29)
Video interview with Liz Cook.
What is due for Lesson 12?
This lesson will take us one week to complete. Please refer to the Course Calendar in Canvas for specific due dates. Specific directions and grading rubrics for assignment submissions can be found in the Lesson 12 module in Canvas.
- Complete all of the Lesson 12 readings and viewings, including the lesson content
- Participate in the Zoom discussion
- Complete Quiz 9
- Project work - Electricity Market Sensitivities
Questions?
If you have any questions, please post them to our Questions? discussion forum (not email). I will not be reviewing these. I encourage you to work as a cohort in that space. If you do require assistance, please reach out to me directly after you have worked with your cohort --- I am always happy to get on a one-on-one call, or even better, with a group of you.