Supply

Abstract

Economic analysis to inform both market participants and policymakers requires a careful explication of industry supply along with demand. As a complement to the specification of power-sector demand, this chapter first establishes components of short-run, i.e., operational, costs that drive a typical firm’s supply function, which can be used to construct industry supply. Next, we focus on long-run supply incorporating investment decisions before connecting supply functions to firms’ profit-maximization decisions. The supply side of the power sector has evolved considerably in recent years due to variable renewable energy sources (VRES), viz. solar and wind technologies, that have null operating costs. The interaction of such VRES with conventional generation technologies is addressed in the context of ramping constraints. As a means of integrating VRES, energy storage is posited, and its economics are examined.