The electricity market is one of the most consequential mechanisms humans have ever built, and it was designed for a world that is disappearing. Its assumptions — that generation is dispatchable, that you can promise a megawatt and deliver it — hold for coal, gas, and nuclear. They do not hold for wind and solar, whose output answers to the weather. A grid with deep renewable penetration needs a market that prices uncertainty, not one that pretends it away.
The idea: pay for what you can actually deliver
Our starting point was auction design. In Auctioning electricity under deep renewable integration using a penalty for shortfall (2019) and its predecessor Selling Renewable Generation with a Penalty for Shortfall (2018), a renewable generator sells energy it might produce, backed by a penalty if it falls short. Using stochastic programming and auction theory, we found something clean: the optimal contracted quantity is a function of the inverse CDF of the renewable supply,
\[q^\star = F^{-1}(\cdot),\]and pairing that allocation with a Myerson-style payment rule makes truthful bidding the buyers’ best strategy. In other words, you can design the market so that honesty is optimal even when supply is random.
The theme continues in Equilibria in two-stage electricity markets (2015) and Dynamic Economic Dispatch … under Ramping Constraints and Uncertain Demand (2018), which study how prices and dispatch evolve when both supply and demand are uncertain and generators can’t ramp instantly.
Demand can flex, too
The other half of the answer is that demand no longer has to be passive. Electric-vehicle charging is a huge, flexible load — it mostly cares that the car is charged by morning, not about the exact hour. In Scheduling EV charging having demand with different reliability constraints (2023) and Preemptive scheduling of EV charging for providing demand response services (2023), we schedule that flexibility to soak up renewable energy when it’s abundant, turning millions of cars into a grid-stabilizing resource. The idea goes back to Scheduling, pricing, and efficiency of non-preemptive flexible loads (2015).
Why it matters
Decarbonizing the grid is not only a hardware problem — it’s a market design problem. Panels and turbines are necessary; mechanisms that make variable supply and flexible demand meet efficiently are what make them usable at scale. Good mechanism design here is worth gigawatts.
What it means going forward
As renewables become the cheapest generation on Earth, the binding constraint shifts from cost to coordination: matching stochastic supply with shiftable demand, moment to moment, without blackouts or waste. The principles compound into the near future:
- EV fleets and batteries become active market participants, bidding flexibility the way generators bid capacity.
- Truthful, uncertainty-aware mechanisms matter more as the share of variable generation grows — the penalty-for-shortfall idea is one template.
- AI-driven forecasting and bidding will sit on top of these markets; the market rules decide whether that intelligence produces reliability or chaos.
Getting the rules right is quietly one of the highest-leverage things we can do for the energy transition.
Papers behind this post: Auctioning electricity under deep renewable integration using a penalty for shortfall (2019) · Selling Renewable Generation with a Penalty for Shortfall (2018) · Equilibria in two-stage electricity markets (2015) · Dynamic Economic Dispatch … under Ramping Constraints and Uncertain Demand (2018) · Scheduling EV charging having demand with different reliability constraints (2023) · Preemptive scheduling of EV charging (2023). See them on the Publications page and the renewable-markets project.