The question of how electricity spot prices can pay for generators that are almost never used has bedeviled market design from the beginning. But it would not cause much damage if it were not that a fundamental economic fallacy has become ubiquitous. Economics provides us with (roughly) the following result:
Result: Competitive pricing of a product will induce optimal investment in its production.
This has been almost universally interpreted to mean:
Fallacy: Uncapped competitive electricity spot prices will lead to optimal reliability.
But in today’s world, “optimal reliability” means “optimal blackouts” (and energy-only advocates think it means even more blackouts than the engineers prefer). Since a blackout due to too little capacity happens because demand exceeds supply, it is the worst sort of market failure. The supply and demand curves fail to intersect! You won’t find that assumption in any standard economic result.
So, in economic terms, the fallacy that nearly all energy-only advocates hold to is this:
Fallacy: Uncapped spot prices will lead to an optimal duration of market failure.
To an economist, this is lunacy. The notion of optimal failure is simply not part of standard economics. And there is no theorem that says unregulated spot markets will build capacity to optimize market failure. Those who believe this “result” are relying on what they think they heard about economics, and do not understand the assumptions or the logic of the true result.
So we are left with nearly everyone thinking that economics tells us that getting rid of price caps would lead to the optimal level of involuntary load shedding. But neither standard economics nor any legitimate extension of it tells us anything of the kind. Ideology has trumped science. The real “logic” behind this belief is “markets are good, regulators are bad; leave the market alone and results will be optimal—whatever that means.” In this case, the real economics is fairly scientific, but its popular policy translation is more akin to religion.