His work draws a line in the sand:
Where the actual physics of the grid takes over, and prices adjust to ensure supply exactly matches demand every second. 4. Locational Marginal Pricing (LMP) power system economics steven stoft pdf
A major theme is how competitive marginal-cost pricing can (or sometimes can't) cover the massive fixed costs of building power plants. The Market Power Myth: His work draws a line in the sand:
Stoft details how generators can "game" the system—physically withholding power to drive up prices or engaging in "economical withholding" by bidding far above marginal cost. His analysis of the California crisis is a masterclass in this pathology. He shows that the crisis was not just Enron’s malice, but a fundamental design flaw that allowed generators to exploit congestion protocols. The Market Power Myth: Stoft details how generators
For engineers, regulators, and energy economists, few textbooks have achieved the cult status of Power System Economics: Designing Markets for Electricity by . Often referred to as the “orange bible” of the electric power industry, this book sits on the desk of everyone from ISO (Independent System Operator) market designers to Ph.D. students.
A recurring theme in Power System Economics is the vulnerability of electricity markets to market power. Because demand is inelastic and generators face steep ramp rates, a single strategic generator can drive prices far above marginal cost by physically withholding capacity during peak hours. Stoft distinguishes between economic withholding (bidding above marginal cost) and physical withholding (declaring a unit unavailable). The former is expected in any competitive market, but the latter, when combined with transmission constraints, can yield extreme price spikes. Stoft’s analysis shows that mitigating market power requires a combination of demand-side responsiveness (rare in practice), must-offer obligations, and price caps—though he warns that poorly designed price caps can suppress investment signals. The optimal mitigation strategy, he concludes, is to increase the elasticity of demand through real-time pricing for end-users.