electricity as an energy carrier. From a policymaker’s perspective, there are two key characteristics of well-functioning and efficient power
markets in a net zero emissions world
18 :
• market structures that provide efficient price
signals, both for near-term electricity dispatch
and for long-term investment in the sector;
and
• energy and environmental policies that correct for market failures and support the efficient operation of power markets.
These two factors are necessary for the efficient operation of net zero emissions power
markets, without which meeting the energy trilemma objectives becomes significantly more
challenging and expensive. For example, in an
environment of rapidly declining technology
costs, markets are better placed than policymakers to competitively and efficiently procure the
necessary investments. However, policymakers
have a fundamental role in providing the necessary regulatory and policy frameworks to
underpin the efficient operation of these markets.
7.1.4 Market Structures for Providing
Efficient Price Signals
The price signal from wholesale and retail power
markets for conventional generation covers the
range of energy provision services: supply of
electricity, investment in generation capacity,
and balance between the demand and supply of
electricity. Variable renewables only provide
energy and do so intermittently. This increases
the importance of capacity and balancing, with
markets potentially being required for these services as they are no longer provided as part of the
bundle that has traditionally been provided by a
single generation asset and paid for through
wholesale and retail electricity prices.
The three requirements for efficient price
signals are discussed below (see also the
left-hand side of Fig. 20).
Efficient electricity markets. Through continued liberalisation of wholesale and retail power
markets (including spatially larger and integrated
markets that maximise the diversity of supply) to
increase competition and security of supply, and
through greater time-of-use and locational pricing with shorter settlement periods to increase the
strength and specificity of the price signal for
efficient electricity dispatch.
Investment in capacity. Through a
technology-neutral capacity market (including
both supply and demand measures and sufficient
penalties to ensure delivery of contracted
capacity), where efficient price signals for new
investment in capacity are generated through
competition among providers of this capacity. By
themselves, short-term price signals from
wholesale and retail markets are not likely to be
enough to incentivise investment in long-term
capacity at high levels of renewable energy
penetration, thus requiring capacity markets.
Competitive balancing services. Short-term,
grid-specific balancing and flexibility services
may also be required to accommodate renewables. These would be required to supplement the
price signal from wholesale and retail markets,
which may be constrained by political economy
considerations to protect end users from unexpected price spikes or due to forecast errors.
Procuring these services competitively will provide them at the least possible cost and encourage the innovative use of new technologies, such
as batteries and technologies that enable
demand-side response. The need for such a
market could decline as the time required to
dispatch from a power plant decreases, and
wholesale and retail power markets become more
instantaneous.
7.1.5 Energy and Environmental
Policies that Correct
for Market Failures
Efficient policy approaches and frameworks to
correct for market failures are also needed to
support the efficient operation of power markets.
Three key characteristics of the required policy
framework are described below (see also the
right-hand side of Fig. 20).
18
Structural Power Market Reform to Support A Decarbonised Economy.
494
S. Yaodong and A. Gillespie
markets in a net zero emissions world
18 :
• market structures that provide efficient price
signals, both for near-term electricity dispatch
and for long-term investment in the sector;
and
• energy and environmental policies that correct for market failures and support the efficient operation of power markets.
These two factors are necessary for the efficient operation of net zero emissions power
markets, without which meeting the energy trilemma objectives becomes significantly more
challenging and expensive. For example, in an
environment of rapidly declining technology
costs, markets are better placed than policymakers to competitively and efficiently procure the
necessary investments. However, policymakers
have a fundamental role in providing the necessary regulatory and policy frameworks to
underpin the efficient operation of these markets.
7.1.4 Market Structures for Providing
Efficient Price Signals
The price signal from wholesale and retail power
markets for conventional generation covers the
range of energy provision services: supply of
electricity, investment in generation capacity,
and balance between the demand and supply of
electricity. Variable renewables only provide
energy and do so intermittently. This increases
the importance of capacity and balancing, with
markets potentially being required for these services as they are no longer provided as part of the
bundle that has traditionally been provided by a
single generation asset and paid for through
wholesale and retail electricity prices.
The three requirements for efficient price
signals are discussed below (see also the
left-hand side of Fig. 20).
Efficient electricity markets. Through continued liberalisation of wholesale and retail power
markets (including spatially larger and integrated
markets that maximise the diversity of supply) to
increase competition and security of supply, and
through greater time-of-use and locational pricing with shorter settlement periods to increase the
strength and specificity of the price signal for
efficient electricity dispatch.
Investment in capacity. Through a
technology-neutral capacity market (including
both supply and demand measures and sufficient
penalties to ensure delivery of contracted
capacity), where efficient price signals for new
investment in capacity are generated through
competition among providers of this capacity. By
themselves, short-term price signals from
wholesale and retail markets are not likely to be
enough to incentivise investment in long-term
capacity at high levels of renewable energy
penetration, thus requiring capacity markets.
Competitive balancing services. Short-term,
grid-specific balancing and flexibility services
may also be required to accommodate renewables. These would be required to supplement the
price signal from wholesale and retail markets,
which may be constrained by political economy
considerations to protect end users from unexpected price spikes or due to forecast errors.
Procuring these services competitively will provide them at the least possible cost and encourage the innovative use of new technologies, such
as batteries and technologies that enable
demand-side response. The need for such a
market could decline as the time required to
dispatch from a power plant decreases, and
wholesale and retail power markets become more
instantaneous.
7.1.5 Energy and Environmental
Policies that Correct
for Market Failures
Efficient policy approaches and frameworks to
correct for market failures are also needed to
support the efficient operation of power markets.
Three key characteristics of the required policy
framework are described below (see also the
right-hand side of Fig. 20).
18
Structural Power Market Reform to Support A Decarbonised Economy.
494
S. Yaodong and A. Gillespie