Interaction between Renewable Energy Integration and Wholesale Electricity Markets: a Legal and Regulatory Perspective

Abstract

Electricity market design and regulation affect the extent to which energy transition policies can deliver their desired results. The economics and policy scholarship has identified varying taxonomies of electricity markets according to different classification criteria. From the perspective of openness of market structure and electricity sector management, electricity markets are liberalised or regulated. Carbon pricing is a crucial regulatory instrument facilitating energy transition. A fully liberalised and competitive electricity market may provide the ideal opportunity to achieve the goals of carbon pricing and energy transition policies. However, fully liberalised electricity markets are far from the norm worldwide. Instead, electricity markets are often subject to government regulation tailored to specific domestic conditions. Most often seen are interim status markets that deviate from strictly regulated ones but are still not fully liberalised with a certain degree of institutional interventions. In particular, the regulation of electricity prices in wholesale markets, which is at the core of the electricity market design, has the most significant effect on introducing regulatory tools of renewable energy integration and carbon pricing that facilitate the energy transition. This chapter discusses the interplay between the wholesale market and renewable energy integration; facilitators such as capacity remuneration mechanisms and carbon pricing are also considered. It focuses on the electricity markets architecture for later chapters to understand how different market design patterns, initially pursuing the liberalisation, carry different weights with carbon market options serving the purpose of decarbonisation and energy transition.