The Vanishing Hand: Efficient Market Design for Future Power Systems

Abstract

Transition to low-carbon power systems is in progress, fuelled by policy-driven accelerated deployment of new renewable electricity generation technologies (wind and solar), smart electrification, prosumerisation and digitisation. Largely occurring against a background of an ongoing process of liberalisation, the recent growth of wind and solar and the positive signs of storage becoming mainstream have created a new urgency to address the challenge of efficient electricity market design. The paper discusses the alternative options for power market redesign. Starting with the wholesale market, we highlight the emerging consensus for more flexible short-term power trading. We then review the debates concerning appropriate frameworks for the transmission and retail markets in view of integrating larger shares of intermittent and geographically dispersed renewables. Throughout, we emphasise the need for a revival of a more profound coupling between engineering and economics to ensure efficient dispatch of energy and flexibility as well as adequate investment in the relevant technologies. Commensurate with the fact that market design must continuously evolve, we argue that effective risk management and governance practices must be put in place to facilitate such adaptation while mitigating market and policy risks.

Keywords: Market design, Intermittent renewables, Flexibility, Governance, Market and policy risks