Guiding the transition: design challenges in decarbonising electricity markets

Abstract

Many liberalized electricity systems are founded upon energy-only market principles which aim to ensure affordable electricity prices. Since the early days of liberalization, it has been questioned whether interactions between market participants, offering and purchasing electricity, provide sufficient investment incentives for safeguarding supply security. Additionally, and as a consequence of the global consensus to drastically reduce carbon emissions, future electricity generation must meet decarbonisation objectives. We argue that market design revisions are possibly inevitable to meet these three main objectives of electricity systems (trilemma): capacity adequacy, emission avoidance and affordability. Results from a Spanish case study demonstrate how changing policy scenarios require additional market mechanisms with significant interdependencies among each other. Here we show how a market mechanism that is not perfectly aligned with the main system objectives, such as renewable payments, is suboptimal to comply with the main objectives. Furthermore, we challenge the premise of cheap green electricity for everyone since the remuneration of additional services increases the total system cost.Many liberalized electricity systems are founded upon energy-only market principles which aim to ensure affordable electricity prices. Since the early days of liberalization, it has been questioned whether interactions between market participants, offering and purchasing electricity, provide sufficient investment incentives for safeguarding supply security. Additionally, and as a consequence of the global consensus to drastically reduce carbon emissions, future electricity generation must meet decarbonisation objectives. We argue that market design revisions are possibly inevitable to meet these three main objectives of electricity systems (trilemma): capacity adequacy, emission avoidance and affordability. Results from a Spanish case study demonstrate how changing policy scenarios require additional market mechanisms with significant interdependencies among each other. Here we show how a market mechanism that is not perfectly aligned with the main system objectives, such as renewable payments, is suboptimal to comply with the main objectives. Furthermore, we challenge the premise of cheap green electricity for everyone since the remuneration of additional services increases the total system cost.