Between 2014 and 2018, rooftop solar capacity in Western Australia more than doubled, making it one of the most solar-saturated regions in the world. This shift reduced daytime reliance on gas-fired plants, which in turn forced them to shut down temporarily. However, as solar output fades in the evening, these plants must restart-often at significant cost-to meet demand. The study found that these start-up costs reduce competition after sunset, allowing fossil fuel generators to increase profits during the evening peak.
"We developed a framework to measure market power in wholesale electricity markets," explained Akshaya Jha, associate professor at CMU's Heinz College and study coauthor. "This framework accounts for features of generating unit technology such as fixed start-up costs and ramping constraints that are becoming increasingly relevant in light of the global transition to intermittent wind and solar technologies."
Because fossil generators incur fixed costs when restarting, they must earn enough revenue above variable costs to justify operation. Traditional approaches that assess market power through price markups over marginal cost fall short in such settings. Moreover, these fixed costs act as a deterrent to entry, softening competition in key periods.
To analyze the effect of rooftop solar growth, the researchers constructed a benchmark comparing actual generation and pricing with a simulated market scenario where units recover both fixed and variable costs optimally. They integrated high-frequency data on fuel inputs and electricity outputs to estimate plant-level cost curves comprising variable costs, fixed start-up costs, and baseline running costs. Their model dynamically scheduled output to meet demand every half hour while minimizing system-wide expenses and ensuring cost recovery.
The results indicated that the growing presence of rooftop solar increased collective market power rents for gas plants in the evenings, even as it drove daytime emissions lower. Since Western Australia's retail electricity prices are determined by cost-of-service regulation, the study concluded that these elevated evening rents effectively shifted wealth from consumers to producers.
Despite minimal changes in market efficiency, the wholesale market does not capture the environmental benefits of reduced emissions. As rooftop solar expanded, daytime carbon output from gas generation plummeted, while evening emissions rose only slightly due to more frequent unit start-ups.
"Our findings speak to the growing relevance of adopting several design features not present in most markets outside the United States," said Gordon Leslie, senior lecturer at Monash University and coauthor. One such feature is permitting generators to submit start-up bids alongside energy bids, enabling better scheduling across hours and enhancing efficiency as start-stop cycling becomes more common.
The study also underscores the importance of financial participation in day-ahead markets, especially in systems where physical constraints limit flexibility and market power is a concern. The authors warn that rooftop solar growth can unintentionally intensify these challenges by increasing the strategic value of start-up decisions.
Finally, the researchers point out that retail pricing reforms could help mitigate these issues. Allowing consumer electricity prices to vary hourly with wholesale market signals would incentivize more daytime use and reduce pressure on fossil fuel plants during the evening ramp-up, ultimately lowering costs for consumers and weakening evening market power.
Research Report:Start-up Costs and Market Power: Lessons from the Renewable Energy Transition
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Carnegie Mellon University
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