Efficient pricing. Chapter 4 has the economic analysis of these prices but keep the following in mind: In an economically efficient world, price would be set according to marginal cost, and fixed costs would be allocated in proportion to infrastructure burden/surplus. Given 26 members, two goods (water and con- veyance) and two costs (fixed and variable), this world would have 104 different prices. What MET has instead are four prices (Tier 1/2, agricultural and surplus) that bundle water and conveyance, include most fixed costs, and do not vary by distance or member.15 Because MET sets Tier 2 prices at marginal cost and targets zero-profits, Tier 1 prices are targeted below MET’s av- erage cost, i.e., Tier 2 sales subsidize Tier 1 sales. Even worse, prices that are fixed almost a year in advance will have little to do with actual supply and demand. The bottom line is that MET’s pricing system is unlikely to facilitate equilibrium, and these implications are discussed in Section 4.4.3.
Efficient pricing. Prices in the wholesale power market are the main reference for operational choices and investment decisions for all generators. Therefore, they must be transparent and should not be kept artificially away from revealing scarcity. This means that price volatility and spikes should be seen as positive outcomes of a market that signals when investments are needed, in capacity and/or in flexibility. Prices in the wholesale market should also relate solely to the marginal costs of producing electricity. The entire rationale of a cost-efficient short-term dispatch of energy relies on ensuring that the most competitive generators are the first to serve demand. Marginal pricing (pay as cleared) therefore, should be considered as the common norm across all time frames, with the exception of continuous intraday trading, where continuous offers (pay-as-bid) should be combined with discrete auctions (pay-as-clear). Restoring today’s depressed low wholesale prices will therefore be a matter of ensuring that the right signals come out of the market itself.
