Designing electricity markets for a high penetration of variable renewables

Abstract

Renewable technologies are often characterized as being somewhat different to ‘conventional’ generating technologies in three ways, each with different implications for electricity markets. Firstly, some have highly variable and somewhat uncertain availability, meaning that electricity markets must be designed to elicit adequate flexibility. Secondly, many have very low short‐run marginal costs (operating costs), meaning that the mechanisms for managing resource adequacy must be carefully considered. Thirdly, some are nonsynchronous, meaning that grid codes and regulatory requirements must be appropriately designed. Access to flexibility can be enhanced by a range of market design choices, such as short dispatch intervals, short delays from gate closure to dispatch, large balancing areas, high demand side participation, and exposing renewable technologies to market price signals commensurate with other technologies. The design of markets for frequency control ancillary services (FCAS) also provides opportunities to increase access to flexibility, by creating active real‐time markets for a wide range of FCAS, allowing renewable technologies to provide FCAS, and determining FCAS reserve requirements dynamically in real time. Mechanisms for managing resource adequacy are a source of ongoing debate, with many of the key issues having been exacerbated by the entry of renewables. Rapid market change makes investment decisions difficult, regardless of the market model applied. Ultimately, given the existence of arguably successful examples of both energy‐only and capacity market designs, the choice of market model may be less important than the quality of governance with which it is implemented and maintained. WIREs Energy Environ 2015, 4:279–289. doi: 10.1002/wene.137This article is categorized under: Energy Infrastructure > Economics and Policy Energy Infrastructure > Systems and Infrastructure Energy Systems Economics > Economics and Policy Energy Policy and Planning > Economics and Policy