Efficient Policy Responses to Changes in Resource Mix and Market Equilibrium

When a jurisdiction alters the equilibrium resource mix, the optimal response should focus on adjusting the market design to restore the prior equilibrium, rather than merely compensating older technologies. This approach counters the common fallacy of reverting back to previous market conditions after introducing subsidies or new technologies. Regulatory changes can induce risk and create a need for compensation for impacted players, yet seeking to return to outdated equilibrium undermines market efficiency. Instead, one should embrace the new equilibrium established by market dynamics, which reflect advancements such as technological innovations that lower costs. Furthermore, misunderstandings often arise in capacitated markets where the actual procurement objectives do not align with market outcomes, potentially leading to inefficient responses. Acknowledging this misalignment is critical—if renewables struggle to secure necessary revenue despite being deemed essential for reliability, it highlights deeper issues regarding the market's ability to meet future energy needs effectively.