Abstract
This paper compares the evolution of USA and European power markets and evaluates the suitability and future challenges of their designs in the context of the transition to a low-carbon power system. The analysis focuses on bidding formats (the way in which organized electricity markets allow participants to express their operational constraints) and pricing schemes (how agents recover their short-term costs from market prices). The radical evolution of the power mixes worldwide already experienced in the last decade and the larger one to come, with even greater shares of renewable energy and a more prominent role for storage resources, exposes limitations in current market designs. We develop an in-depth and comprehensive review of best practices from both sides of the Atlantic, and learning from them, we draw recommendations to evolve these market design elements.
Highlights
In the context of liberalized electric power systems, organized short-term electricity markets (as, for instance, the ones run by power exchanges in the European context (See www.europex.org)) help participants manage their risks, but mainly serve as a tool to facilitate an efficient matching of supply and demand, ideally contributing to the goal of maximizing market welfare
Other studies have discussed the impact of these changes in power markets performance, e.g., Hu et al [1] and IRENA [2] develop comprehensive reviews on overall system needs, and Anuta et al [3] focuses on the specific case of storage, but this paper focuses on bidding formats in greater detail and encompasses power system resources with more generality
Markets already provide detailed multi-part bids to reflect the most relevant constraints of thermal generators, European markets provide a limited choice of block orders and complex conditions
Summary
In the context of liberalized electric power systems, organized short-term electricity markets (as, for instance, the ones run by power exchanges in the European context (See www.europex.org)). In a non-convex context, there may be no linear prices (constant prices that remunerates all quantities) that are able to support a competitive market equilibrium To deal with this issue, again, USA and Europe have opted for different approaches, and in both cases, these different schemes are being challenged by the penetration of new resources. Bidding formats and pricing rules are key market design elements to allow for an efficient and massive integration of new resources such as renewables and battery storage systems. The paper is structured as follows: In Section 2 we describe how USA and European markets followed very different approaches to the design of bidding formats and pricing rules.
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