Abstract
We present a systematic review of the challenges to the regulation of electricity markets that are posed by the integration of variable renewable energy sources. System integration is the key to developing the required flexibility, because flexibility options exist at all system levels and within the competitive as well as in the regulated (network) domains. The fluctuating nature of variable renewable energy changes the dynamics of investment decisions. We develop a framework for analysing relations between aspects of the regulation of the power sector that need to be coordinated in order to achieve (or at least improve) economic efficiency. We base the framework on the technical functionalities of the electricity infrastructure, which we group along three dimensions: system level (from retail/distribution to transmission/wholesale), geographic scope (the connection between electricity systems) and time scales (from real-time operations and balancing markets to the investment time scale). The framework helps identify regulatory challenges—potential inefficiencies due to a lack of coordination—and to place them into context. The picture that emerges from this approach is that the institutional fragmentation of the European electricity sector will become increasingly burdensome as the development variable renewable energy requires ever closer coordination between countries, between the different levels of the electricity system and between markets that serve different time scales. Interactions between elements of market design and regulation such as congestion management, renewable energy policy and system adequacy policy affect each other and are an additional reason for a system integration approach to regulation.
Highlights
The history of the debate about system adequacy is a good example of how an integrated systems perspective is gaining ground
The way in which electricity is traded will need to change along all three of the dimensions of our framework: as more variable renewable energy is produced, and more flexibility options are developed at all system levels, trade needs to be better integrated at the same time across borders and between system levels, while trade closer to real time needs to be facilitated
The key challenge that is posed by the introduction of variable renewable energy sources is to develop more flexibility in all parts of the electricity infrastructure
Summary
Congestion management is the instrument by which scarce network capacity is allocated to market parties. A ‘copper plate’ is assumed, meaning that if the network is congested, this does not affect market clearing. Market splitting, market coupling and/or explicit auctions of network capacity are applied (De Vries and Hakvoort, 2002; Meeus et al, 2009; Neuhoff et al, 2011). The fact that network constraints within price zones are not taken into account in the clearing of the markets and the fragmented nature of this approach cause it to be inefficient, with the costs increasing as the share of RES increases (Ehrenmann and Smeers 2005; Neuhoff et al 2013; Bertsch et al 2015). Network congestion management relates to several other policy objectives, in addition to the integration of renewables: the development of demand price elasticity and the integration of electric vehicles and system adequacy
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