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Jesse gives Rob a lesson in marginal generation, inframarginal rent, and electricity supply curves.

Most electricity used in America today is sold on a wholesale power market. These markets are one of the most important institutions structuring the modern U.S. energy economy, but they’re also not very well understood, even in climate nerd circles. And after all: How would you even run a market for something that’s used at the second it’s created — and moves at the speed of light?
On this week’s episode of Shift Key Summer School, Rob and Jesse talk about how electricity finds a price and how modern power markets work. Why run a power market in the first place? Who makes the most money in power markets? How do you encourage new power plants to get built? And what do power markets mean for renewables?
Shift Key is hosted by Jesse Jenkins, a professor of energy systems engineering at Princeton University, and Robinson Meyer, Heatmap’s executive editor.
Subscribe to “Shift Key” and find this episode on Apple Podcasts, Spotify, Amazon, YouTube, or wherever you get your podcasts.
You can also add the show’s RSS feed to your podcast app to follow us directly.
Here is an excerpt from our conversation:
Jesse Jenkins: If I’m just a utility operating on my own, I want to basically run my fleet on what we call economic dispatch, which is rank ordering them from cheapest to most expensive on a fuel or variable cost basis, and trying to maximize my use of the less expensive generators and only turn on the more expensive generators when I need them.
That introduces this idea of a marginal generator, where the marginal generator is the last one I turned on that has some slack to move up or down as demand changes. And what that means is that if I have one more megawatt-hour of demand in that hour — or over a five-minute period, or whatever — or 1 megawatt-hour less, then I’m going to crank that one generator up or down. And so the marginal cost of that megawatt-hour of demand is the variable cost of that marginal generator. So if it’s a gas plant that can turn up or down, say it’s $40 a megawatt-hour to pay for its fuel, the cost on the margin of me turning on my lights and consuming a little bit more is that that one power plant is going to ramp its power up a little bit, or down if I turn something off.
And so the way we identify what the marginal value of supplying a little bit more electricity or consuming a little bit more electricity is the variable cost of that last generator, not the average cost of all the generators that are operating, because that’s the one that would change if I were to increase or decrease my output.
Does that make any sense?
Robinson Meyer: It does. In other words, the marginal cost for the whole system is a property of the power plant on the margin, which I realize is tautological. But basically, the marginal cost for increasing output for the entire system by 1 megawatt-hour is actually a property of the one plant that you would turn on to produce that megawatt-hour.
Jesse Jenkins: That’s right, exactly. And that can change over the course of the day. So if demand’s really high, that might be my gas plant that’s on the margin. But if demand is low, or in the middle of the day, that gas plant might be off, and the marginal generator during those periods might be the coal plant or even the nuclear plant at the bottom of the supply curve.
Mentioned:
Jesse’s slides on electricity pricing in the short run
Jesse’s lecture slides on electricity pricing in the long run
Shift Key Summer School episodes 1, 2, and 3
This episode of Shift Key is sponsored by …
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Join clean energy leaders at RE+ 25, September 8–11 in Las Vegas. Explore opportunities to meet rising energy demand with the latest in solar, storage, EVs, and more at North America’s largest energy event. Save 20% with code HEATMAP20 at re-plus.com.
Music for Shift Key is by Adam Kromelow.
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At San Francisco Climate Week, John Reynolds discussed how the state is juggling wildfire prevention, climate goals, and more.
Blessed with ample sun and wind for renewables but bedeviled by high electricity prices and natural disasters, California encapsulates the promise and peril of the United States’ energy transition.
So it was fitting that Heatmap House, a day of conversations and roundtables with leading policymakers, executives, and investors at San Francisco Climate Week, kicked off with John Reynolds, president of the California Public Utilities Commission.
The CPUC oversees the most-populous state’s utilities and has the power to approve or veto electricity and natural gas rate increases. At Heatmap House, Reynolds — “one of California’'s most important climate policymakers,” as Heatmap’s Robinson Meyer called him — affirmed that affordability has been top of mind as power bills have risen to become a mainstream political issue across the country. California’s electricity prices are the second-highest in the nation, behind only Hawaii, according to the Electricity Price Hub.
“I’d really like to see us drive down the portion of household income that is consumed by energy prices,” Reynolds said in a one-on-one interview with Rob. “That’s a really important metric for making sure that we’re doing our job to deliver a system that’s efficient at meeting customer needs and is able to support the growth of our economy.”
The Golden State’s power premium has been exacerbated by the fallout from multiple wildfires that have devastated various parts of the state in recent years, which have necessitated costly grid upgrades such as undergrounding power lines. California-based utility PG&E has also invested in more futuristic fire solutions such as “vegetation management robots, power pole sensors, advanced fire detection cameras, and autonomous drones, with much of this enhanced by an artificial intelligence-powered analytics platforms,” as Heatmap’s Katie Brigham wrote shortly after last year’s fires in Los Angeles.
Affordability affects not just Californians’ financial wellbeing, but also the state’s ability to decarbonize quickly. “The affordability challenge that we’re seeing in electric and gas service is one that is going to make it more difficult to meet our climate goals as a state,” Reynolds said.
One contentious — and somewhat byzantine — aspect of California’s energy transition is how much of a financial incentive the CPUC should offer for residents to install rooftop solar. Net metering is a billing system that rewards households with solar panels for sending excess generation back to the grid. Three years ago, the CPUC adopted a new standard that substantially lowered the rate at which solar panel users were compensated.
“We had to slow the bleeding,” Reynolds said, referring to the greater financial burden paid by utility customers without solar panels. “The net billing tariff did slow the bleeding, but it didn’t stop it.”
Asked whether he is focused more on electricity rates (the amount a customer pays per kilowatt-hour) or bills (the amount a utility charges a ratepayer), Reynolds said both are important.
“If we can drive down electric rates, we’re going to enable more electrification of transportation and of buildings,” Reynolds said. “It’s really important to look at bills, because that is fundamentally what hits households. People’s wallets are limited by their bills, not by their rates.”
The state has terminated an agreement to develop substations and other necessary grid infrastructure to serve the now-canceled developments.
Crucial transmission for future offshore wind energy in New Jersey is scrapped for now.
The New Jersey Board of Public Utilities on Wednesday canceled the agreement it reached with PJM Interconnection in 2021 to develop wires and substations necessary to send electricity generated by offshore wind across the state. The board terminated this agreement because much of New Jersey’s expected offshore wind capacity has either been canceled by developers or indefinitely stalled by President Donald Trump, including the now-scrapped TotalEnergies projects scrubbed in a settlement with his administration.
“New Jersey is now facing a situation in which there will be no identified, large-scale in-state generation projects under active development that can make use of [the agreement] on the timeline the state and PJM initially envisioned,” the board wrote in a letter to PJM requesting termination of the agreement.
Wind energy backers are not taking this lying down. “We cannot fault the Sherrill Administration for making this decision today, but this must only be a temporary setback,” Robert Freudenberg of the New Jersey and New York-focused environmental advocacy group Regional Plan Association, said in a statement released after the agreement was canceled.
I chronicled the fight over this specific transmission infrastructure before Trump 2.0 entered office and the White House went nuclear on offshore wind. Known as the Larrabee Pre-Built Infrastructure, the proposed BPU-backed network of lines and electrical equipment resulted from years of environmental and sociological study. It was intended to connect wind projects in the Atlantic Ocean to key points on the overall grid onshore.
Activists opposed to putting turbines in the ocean saw stopping the wires as a strategy for delaying the overall construction timelines for offshore wind, intensifying both the costs and permitting headaches for all state and development stakeholders involved. Some of those fighting the wires did so based on fears that electromagnetic radiation from the transmission lines would make them sick.
The only question mark remaining is whether this means the state will try to still proceed with building any of the transmission given rising electricity demand and if these plans may be revisited at a later date. The board’s letter to PJM nods to the future, asserting that new “alternative pathways to coordinated transmission” exist because of new guidance from the Federal Energy Regulatory Commission. These pathways “may serve” future offshore wind projects should they be pursued, stated the letter.
Of course, anything related to offshore wind will still be conditional on the White House.
This year’s ocean-heating phenomenon could make climate change seem less bad than it really is — at least in the U.S.
You may have heard that we could be in for a “super” or even a “super duper” El Niño this year. The difference is non-technical, a matter of how warm the sea surface temperature in the El Niño-Southern Oscillation region of the central-eastern Pacific Ocean gets. An El Niño forms when the region is at least half a degree Celsius warmer than average, which causes more heat to be released into the atmosphere and affects global weather patterns. A super El Niño describes an anomaly of 2 degrees or higher. Some models predict an anomaly of over 3 degrees higher than average for this year.
If a super El Niño forms — and that is still a big if, about a one-in-four chance — it would be the fourth such event in just over 40 years. But the impacts could be even more severe, simply because the world is hotter today than it was in the previous super El Niño years of 1983, 1998, and 2016.
“2016 would be an unusually cold year if it occurred today,” Zeke Hausfather, the climate research lead for payment processing giant Stripe and a research scientist at Berkeley Earth, told me. “1998 would be exceptionally cold.”
And yet in a strange twist, a 2026-2027 El Niño event might actually make Americans care less about climate change. Though many parts of the world are likely to get clobbered by El Niño’s characteristic combination of hotter, drier weather, the phenomenon has the potential to alleviate some of the extreme weather we’ve seen recently in the United States.
For example, warmer, wetter conditions in the southern U.S., milder winters in the north, and increased wind shear in the Atlantic hurricane basin are all classic El Niño signatures in North America.
“It may actually mean a better snow season for the Western U.S. and the mountains, hopefully recovering our snowpack if it’s not too warm,” Hausfather said. “We might benefit from higher rainfall” next winter, which could help lift widespread drought conditions in the southwest. High wind shear usually results in reduced hurricane activity in the Atlantic by depriving the storm systems of their heat engines and causing them to be too lopsided to organize into a full-blown cyclone.
Though the body of evidence for climate change remains incontrovertible, the temporary reprieve in some of its more visible effects will almost certainly make some Americans less concerned. Blame it on evolutionary biology. Brett Pelham, a social psychologist at Montgomery College who researches egocentrism and biases, told me that humans are hardwired to pay attention to the conditions happening directly around them. “That’s great if you’re living 20,000 or 80,000 years ago,” he said. “But today, we’re pumping tons of greenhouse gases into the atmosphere, and it’s a recipe for disaster because people only care deeply about that problem if they feel the heat on a pretty chronic basis where they live.”
People are generally less likely to believe the planet is warming on a snowy day in March than they are in the summer, and a lower average state temperature is about as reliable a predictor of climate change skepticism as being a Republican, even when controlling for income, party affiliation, education, and age. Given that it is, in theory, easier to convince someone living in scorching hot Phoenix that greenhouse gases are warming the atmosphere than someone living by a lake in Minnesota, if an El Niño mellows out some extreme weather trends in the U.S. this year and next, it could also mellow some of the sense of urgency to act.
“It’s a definite implication of my work that day-to-day variation, monthly variation, and geographical variation matter,” Pelham said.
“If my data are true,” he added, “it’s going to be true on average that in places that have an unseasonably cool summer or winter, there’s going to be a temporary shift in the average attitude.”
Such shifts affect the average by just a few points either way — “they’re not night and day, like ‘I believed in climate change and now I don’t,’” Pelham stressed. But it’s undoubtedly ironic — and concerning — that heading into what could be one of the hottest years on the planet in recent history, Americans may be predisposed to feeling relatively safe.
Other parts of the world won’t have such luxury. Even a normal-strength El Niño, which looks all but certain to form this year, could cause major damage, from wildfires in parched Indonesia to catastrophic floods in East Africa to water rationing in South America. In Peru and Ecuador, El Niño is already a “current event,” Ángel F. Adames Corraliza, an atmospheric researcher at the University of Wisconsin-Madison and a 2025 MacArthur Fellow, told me. Warm coastal conditions off the continent — a known, albeit not guaranteed, global El Niño precursor — are causing deluges, landslides, and heat waves in the upper northwest corner of South America. “You can see how the impacts start extending towards other parts of the world until it reaches us,” he said.
It is possible to combat local biases. Pelham told me other researchers have found that images can break through our egocentrism. So “if we see more pictures of melting glaciers or waters rising in our own backyards, we would start to say, ‘Oh my goodness, we really have to do something about this global problem,” he said.
But to that end, coverage of climate change that might have this effect is becoming rarer. Stories about global warming have dropped about 38% since 2021; even people working in climate-related industries have “a kind of exhaustion with ‘climate’ as the right frame through which to understand the fractious mixture of electrification, pollution reduction, clean energy development, and other goals that people who care about climate change actually pursue,” my colleague Robinson Meyer wrote based on the results of latest Heatmap Insiders Survey.
Of course, there is no promise that the U.S. will skirt disaster because of El Niño. Increased rainfall means more floods and landslides; if the El Niño pushes temperatures up too high, snowpack will once again be an issue next winter. All it takes is one big hurricane forming and making landfall for it to be considered a bad storm year, which is as much a roll of the dice as anything else. And because El Niño releases ocean heat into the atmosphere, the periods immediately following it are often about two-tenths of a degree Celsius warmer, increasing the severity of heat waves and droughts. Compounded by climate change, that puts 2027 on track to be potentially the hottest year the planet has seen in human history.
“We might be at 1.45 degrees Celsius [above preindustrial levels] next year from human activity, and we might end up at 1.65 degrees because there’s a very strong El Niño,” Hausfather said. But for context, “we are seeing that much warmth added to the climate system from human activity roughly every decade,” he told me. That is, “— we’re adding a permanent super El Niño-worth of heat to the climate system” via the continued burning of fossil fuels.
There couldn’t be a worse time to let up on our collective sense of climate urgency, to put it mildly. But if El Niño makes conditions in the U.S. appear any better, then even if there’s disaster elsewhere, “you’re going to give a sigh of relief,” Pelham predicted. “You’re going to feel like [climate change is] not as bad as people have hyped it up to be.”