  Studies looking at electricity market designs for very high shares of wind
and solar often conclude that the energy-only market will break down. Without
fuel costs, it is said that there is nothing to set prices. Symptoms of
breakdown include long phases of zero prices, scarcity prices too high to be
politically acceptable, prices that collapse under small perturbations of
capacities from the long-term equilibrium, cost recovery that is impossible due
to low market values, high variability of revenue between different weather
years, and difficulty operating long-term storage with limited foresight. We
argue that all these problems are an artefact of modeling with perfectly
inelastic demand. If short-term elasticity to reflect today's flexible demand
(-5%) is implemented in the model, these problems are significantly reduced.
The combined interaction of demand willingness to pay and storage opportunity
costs is enough to produce stable pricing. This behavior is illustrated by a
model with wind, solar, batteries, and hydrogen-based storage, where a
piecewise linear demand curve removes high price peaks and reduces the fraction
of zero-price hours from 90% to around 30%, and entails more price stability
for perturbations of capacity and different weather years. Furthermore, we show
that with elastic demand, the long-term model exactly reproduces the prices of
the short-term model with the same capacities. We then use insights from the
long-term model to derive simple bidding strategies for storage so that we can
also run the short-term model with limited operational foresight. We
demonstrate this short-term operation in a model trained on 35 years of weather
data and tested on another 35 years of unseen data. We conclude that the
energy-only market can still play a key role in coordinating dispatch and
investment in the future.
