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Workshop at the International Energy Agency, Paris 30 October 2015 Electricity market design for high shares of renewables A study for IEA RETD
Workshop at the International Energy Agency, Paris
30 October 2015
Electricity market design for high shares of renewables
A study for IEA RETD
Agenda
12.30 – 13.00: Welcome lunch and coffee
13.00 – 13.45: Introductions and presentation of the study
Objectives of the policy paper and presentation of preliminary findings – FTI-CL Energy
13.45 – 15.00: 1st roundtable discussion
Reflection on the energy-only market
Reflection on the prosumer/decentralised market
Interactive discussion
15.00 – 15.45: Coffee break
15.45 – 17.00: 2nd roundtable discussion
Reflection on the state-led hybrid system
Reflection on the vertically integrated utility
Interactive discussion
17.00 – 17.30: Wrap up and close
Introductions
Neon is a Berlin-based boutique consulting firm for energy economics. We
combine expertise on economic theory with advanced modelling
capabilities and extensive industry experience. Neon specializes in four
areas:
1. The economics of wind and solar power
2. Design of spot and balancing power markets
3. System costs / integration costs
4. Open-source power market modelling
www.neon-energie.com
4
FTI Consulting is a multidisciplinary international consulting
company. NEON is a specialised consulting boutique
FTI Consulting activity
PROFESSIONAL EXPERTISE
Reputable consultats in a variety of domains with
respect to international clients
ENERGY EXPERTISE
FTI-CL Energy experts have advanced expertise in the
issues of electricity market design
INTERNATIONAL SCOPE
Over 4,200 professionals in 24 countries on 6
continents
NEON Consulting activity
Context and objectives of the study
Project context:
Toward high shares of renewables in the generation mix
In a carbon-constrained
world, variable renewables will
supply a large share of
electricity
IEA ETP 2014 2 degrees
scenario: VRE represent 30-
45% in most world regions by
2050 (other studies provide
similar estimates)
6
The share of variable renewables (VRE) in electricity generation in selected regions
IEA (2014): Energy technology perspectives, 2DS scenario.
The 3 stages of RES development
These challenges will play out differently depending on the power system organisation:
■ In jurisdictions with liberalised power sector: growing concern that competitive wholesale markets co-existing with policy
support for VRE deployment may not provide a level playing field and may turn out unsustainable in the long-term
■ In jurisdictions with vertically integrated utilities or hybrid systems: increasing RES capacity run by independent power
producers may require revisions of the regulations defining the rules for grid access and system operation, ensuring the
level playing field between the IPPs and the incumbent
■ In jurisdictions with active prosumer participation: new questions emerge around the interface between retail and
wholesale markets as well as on the regulation of distribution system operators
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Rising share of Renewables
Supporting RES development
Design of RES support policies
RES on the side of power market
Mainstreaming RES
RES integration into market
RE-design of support mechanisms
Design power market around RES
Changes to market design for high shares of RES
Allowing phase out of support for mature technologies
Focus of this
study
Issues associated with significant shares of VRE
Objectives of the study: a set of policy recommendations
■Aimed at the reform of the current market and regulatory frameworks.
■To accommodate high shares of renewable energy, in particular VRE, in a timely, cost-effective and secure fashion.
■Differentiated between jurisdictions, in particular those with liberalised wholesale markets and countries without.
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How to ensure efficient power system operations? How to ensure efficient power system investment
and development?
• What properties do power markets need to support
full integration of variable renewables?
• What type of support policies minimize
interferences with the market?
• What market design and regulations are required to
deal with intermittency and maintain system
stability?
• How can incentives be designed to maximise
system operating flexibility?
• How to facilitate financing for capital intensive
technologies? Are risk transfer / hedging
mechanisms needed?
• How to coordinate and provide efficient investment
signals across decentralised and centralized
generation, and network expansion?
• What kind of policies are needed to support
investment in key enabling infrastructure, such as
network expansion and storage development?
Project structure: three main tasks
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Define a set of basic criteria of a functioning policy, market and regulatory
framework based on policy objectives and relevant electricity system
fundamentals
Identify challenges in meeting these criteria
Identify the main attributes of an “ideal” policy, market and regulatory framework
Task 1
Market design criteria
and prototype market
designs
Task 2
Bridge the gap
Task 3
Policy recommendations
– no-regret measures
Identify the ways to bridge the gap between today and the long-term ideal
described
What changes to current frameworks are necessary to make progress towards the
‘ideal’ frameworks?
What determines the pace at which progress can be made?
Policy recommendations
Proposed next steps
Derived from the findings of Task 1 and 2. Inte
rna
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Focus of this
workshop
Previous works on the subject of IEA-RETD and IEA
This project aims to build on the pre-existing research on the design of electricity systems where variable
renewables dominate by:
■ Focusing on the diversity of the power systems and different reforms required in different jurisdictions
■ Applying an approach that uses the ideal market designs in the high-VRE future as a starting point
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IEA-RETD IEA – Grid Integration of Variable Renewables (GIVAR)
RES-E-NEXT (July
2013)
Assessment of issues that will shape power
system evolution to high levels of variable RES-E
generation. The report considers policy domains,
such as securing RES-E generation, Securing
Grid Infrastructure, Enhancing Flexibility and
Securing Generation Adequacy
Phase 1 - Empowering
Variable Renewables,
Options for Flexible
Electricity Systems, 2008
Identified strategic elements to facilitate
deployment of VRE
OPTIMUM (March
2014)
A generic view on challenges and key policy
actions necessary to deliver the energy system
of a high renewable energy world might look like
in 2050, such as political buy-in, energy
efficiency, and mobilising investment
Phase 2 - Harnessing
Variable Renewables: a
Guide to the Balancing
Challenge (2011)
Presents a new method developed by the IEA to
shed light on managing power systems with
large shares of variable renewables. Written for
decision-makers, it explores the twin challenges
of variability and uncertainty from a technical
perspective.
RE-INTEGRATION
(January 2015)
Discussed criteria and factors on the relative
applicability and effectiveness of options for
integrating variable RE based on actual
interventions to date across 9 jurisdictions
Phase 3 - The Power of
Transformation – Wind,
Sun and The Economics
of Flexible Power
Systems (2014)
Provides a detailed economic assessment of
the flexible resources (flexible generation, grid
infrastructure, electricity storage, demand side
integration) that can facilitate VRE system and
market integration.
RE-PROSUMERS
(June 2014)
An overview of prosumer-related aspects,
focussing on residential solar PV.
RE‐POWERING
ELECTRICITY MARKETS
Market Design and
Regulation during the
Energy Transition
Can we make market design fit for purpose for
decarbonisation? What changes are necessary
in Short term markets, Demand response,
Transmission investments, Distribution network
regulation and Retail pricing?
Our approach: from the ideal market design toward
transition pathways
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time / VRE share
• Spot markets
• Ancillary services
• Int’l market integration
• Reducing political risks
• ...
Policy making as a search process: gradual adjustments, stakeholder involvement, learning
2015 2016-2020 2020-2050 2050
Inception
A variety of current market
designs
Clustered case studies
Task 1
Prototypes
and
blueprints
Task 2
Transition
pathways
Task 3
Policy
recommandat
ions
Project
phases
Markets
time
scale
Analytical framework of Task 1 may be adjusted as a result of the results in Task 2 and 3
Methods Literature
reviews
Bilateral
interviews
Case study
analysis Workshop
Focus of
this
workshop
Key challenges for power system with high shares of VRE
Three main challenges of VRE to power systems
2 3
13
1
0
20
40
60
80
100
Wind CCGT
€/M
Wh
CAPEX OPEX
Capital intensity Limited predictability and
variability
Decentralized and scattered
generation
Three main challenges of VRE to power systems
Cost recovery
■ VRE are capital intensive
■ Flexibility resources are capital
intensive
Cost of capital
■ Capital costs (expected rate of
return / WACC) becomes major
driver of power system costs
Optimal generation mix shifts
■ Shift towards mid- and peak-
load thermal plants
■ Transition towards new mix
needs to be managed
Time horizon of power system
operations shortens
■ Operational planning horizon
shortens
■ Rates of change become larger
(e.g. residual load ramp rates)
Assurance of system stability
■ Higher demand for AS
■ New constraints of AS provision
(e.g. few thermal plants left)
Transmission grid
■ Good sites for wind and solar
power are often far from load
centres
Distribution grid
■ Larger share of generation is
connected to distribution grid
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Capital intensity Limited predictability and
variability
Decentralized and scattered
generation
Criteria for an ideal power market design with high shares
of VRE
Governance and institutional framework (roles of policy,
independent regulator, etc.)
Infrastructure regulation (transmission, distribution)
The wide scope of market design and policy frameworks
Market design shapes the incentives
under which all these decisions are
taken
Market design consists of a set of
rules specified by policy and
regulation at multiple layers,
implemented in a large number of
different laws, administrative orders,
and market provisions.
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RES support
Retail market
Balancing and ancillary services
Wholesale market
Long-term investment decisions
Market design challenges by time frame
Short-term operational decisions
Years ahead
Months ahead
D-1 Real time
Balancing
D
Ancillary services procurement
Unit Commitment and dispatch
Decades ahead
Transmission congestion management
Flexibility resources
Conventional generation
capacity
Transmission and distribution network
Wind and solar capacity
Liberalised
markets
Vertically
integrated
regulated
utilities
Day ahead markets
Intra-day markets
Real time (balancing) markets
Market splitting and re-dispatch
Medium-term and short-term optimization
Dispatch of independent power producers
Price signals from short-term markets (spot market
and ancillary services)
Dedicated long-term price signals (e.g. technology-
neutral capacity markets or support schemes)
Generation and transmission expansion planning
Grid access and compensation rules for
independent power producers
Decisions
in the
electricity
sector
Three main challenges of VRE to market design
Cost recovery: Credible
investment incentives
■ Credible investment signals
■ Implications for the design of
energy markets, capacity
markets, support schemes
Cost of capital: limiting risk
exposure
■ Exposure to risk, including
policy risk, is a fundamental
factor determining total system
costs if the system is capital-
intensive
■ Trade-off between policy
flexibility and regulatory risk
Price volatility
■ More volatile prices
■ Product definition (e.g.,
peak/off-peak) looses relevance
Spot market design
■ Reduced gate closer
■ Higher frequency
■ Both day-ahead and intra-day
Assurance of system stability
■ Need for new AS products, e.g.
providing system inertia
■ Redesign AS to allow VRE
participation
Coordination between
generation and grids
■ Increased investment demand
requires new approach to TSO
and DSO regulation
■ Locational price signals for
generators needed
Prosumers
■ Retail prices becomes
investment signal
■ Base for taxes and grid fee
erodes
■ Many small producers need
access to wholesale markets
18
Capital intensity Limited predictability and
variability
Decentralized and scattered
generation
Criteria for ideal market design with high level of VRE
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Economic welfare (subject to meeting the policy objectives and operational constraints)
Efficient dispatch
Efficient investment
Appropriate
risk allocation
Appropriate rent allocation
Dispatch signals
Ancillary services
Geographical co-ordination
Pricing externalities
Investment signals
Coherence short/long-term
RES support schemes
Locational signals
Appropriate risk allocation
Minimizing financing costs
Robust to market power
Stranded assets management
Environmental externalities
Power system externalities
Ultimate goal
High-level criteria
Specific criteria Reducing policy
risk Avoid windfall profits
The diversity of power systems and implications for
market design
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Source: FTI-CL Energy analysis based on various sources including World Bank
Power market of gencos, discos and large users,
transco and ISO
Vertically integrated monopolist
Vertically integrated monopolist + IPPs
Single Buyer as a national genco, disco or disco, or a combined notional genco-
transco or transco-disco + IPPs
Many discos and gencos, including IPPs, transco as a Single Buyer with Third-
Party access
Stylized models of power system organization:
4 different prototypes
Real-world market and policy design is diverse, complex, multi-level and path-dependent.
To address this diversity in a transparent way, we propose to study a small number of power system prototypes
Each real-world market represents a combination of these prototypes
Each prototype allows to focus on a specific aspect of market design
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Power system prototype Aspect of market design Case studies
Energy-only market Credible energy & AS spot and
forward price signal Texas , Australia, Nord Pool
Prosumer market Distributed generation, self-
consumption, distribution grid Germany, Australia, France
State-led hybrid system Design of state-led capacity
contracts and markets Brazil, UK
Vertically integrated utility Regulation, market access for third
parties South Africa, Japan, Quebec
Toward an ideal market design for each prototype
Energy Only market Critical elements of ideal market design
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Element of
market design
Challenge presented by
VRE Ideal market design elements
Design of spot
and ancillary
services
markets
• Shift of the operational
timeframe to real-time
• Increased capital intensity
and price variability
• New requirements for AS
products, and new
constraints to provide them
Move the spot price reference to the real-time price, e.g.
• Absence of barriers between real-time and ID/DA markets
• Single price imbalance prices
Credible scarcity pricing
• Scarcity pricing mechanisms based on operating reserve demand
curves
• Non-distortive market power and manipulation legislation
Efficient valuation of flexibility services
• Spot ancillary services products (operating reserves)
• Technology-neutral balancing responsibility
Locational price
signals
• Increasing distance
between generation and
consumption
Ensure locational differentiation of energy prices perceived by generators
to ensure transmission/generation coordination
• Nodal or zonal energy prices
• Network injection charges
Forward
markets /
hedging
products
• Classical product definitions
loose relevance (e.g., peak /
off-peak)
• Increased capital intensity
and price variability
Fostering the liquidity of long-term markets
• Market makers
• New financial products to hedge against all spot products (e.g.
operating reserves)
• Forward financial transmission rights
1
2
3
Prosumer market Critical elements of ideal market design
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Element of
market design
Challenge presented by
VRE Ideal market design elements
Retail pricing
• Prosumers’ investment
incentives
• Tax base erosion
Acknowledge the new role of retail prices: not only cost recovery,
also generation and investment incentives
• Opt 1: finance certain retail price components from other sources
(capacity-based fees, general budget, ...)
• Opt 2: tax self-consumed electricity as well
DSO regulation
• Regulation for (smart)
grid investments
• Geographic coordination
Coordinate distribution grid and generation investments to
incentivize investment and innovation
• Opt 1: cost-reflective grid fees (connection and/or usage)
• Opt 2: “zoning” for distributed generation investments
Market access • Market access for many
small-scale actors
Provide market access: consider risk and transaction costs
• Opt 1: single-buyer model– should not be the SO
• Opt 2: competing aggregators, prosumers can choose
• Opt 3: aggregators + “market access of last resort”
• Balancing and pricing rules should be size-neutral
1
2
3
State-led Critical elements of ideal market design
25
Element of
market design
Challenge presented by
VRE Ideal market design elements
Integrated
resource
planning /
coordination
• Increasing distance
between generation and
consumption
• Increased capital intensity
and price variability
• Shift of the thermal plants
towards mid- and peak-load
Efficient resource planning and procurement process
• Transparent process for determination of investment needs
• Transparent and non-discriminatory process for tendering and
allocation to third parties
Interface
between market
and state driven
operational
processes
• Shift of the operational
timeframe to real-time
• New requirements for AS
products, and new
constraints to provide them
Ensure the state driven processes do not distort the short-term price
signals required for flexibility resources
• Avoid rolling the short-term products into the capacity contracts
• Ensure the capacity contracts do not prevent the incentives for efficient
short-term operation
Structure of the
state-led
capacity
contracts
• Shift of the thermal plants
towards mid- and peak-load
Induce efficient investment in all types of capacity coordinated with
network development
• Induce the optimal volume of capacity including volume of VRE
consistent with the social cost of emission to the society
• Ensure that for each technology the contracts reward the specific value
that this technology provides to the system
• Allow coordinating the investment in generation with the existing and
future transmission and distribution networks
1
2
3
Vertically integrated utility Critical elements of ideal market design
26
Element of
market design
Challenge presented by
VRE Ideal market design elements
Regulatory
framework
• Achieving the optimal
generation mix under the
decarbonisation constraints
Ensure efficient investment, including renewable, with no undue rent
transfers through regulatory mechanisms
• Incentive regulation to invest in the renewable generation to meet the
applicable environmental targets
• The regulatory framework should ensure an efficient risk sharing
between customers and the utility.
Resource
planning and
procurement
process
• Achieving the optimal
generation mix under the
decarbonisation constraints
• Increasing distance
between generation and
consumption
Efficient resource planning and procurement process
• Transparent process for determination of investment needs
• Transparent and non-discriminatory process for tendering and
allocation to third parties
Rules for the
third-party
access
• Operational timeframe
shift towards real-time
• System stability through
ancillary services and
demand response
No discrimination against IPP’s for the short-term dispatch
Efficient IPP’s investment (timing and location)
Cross border
trading
arrangements
• The shift of operational
timeframe to real-time
Ensure efficient short-term trade with neighbouring utilities
• Introduce bilateral and or organised energy cross-border trading
• May require reforms in the direction of those in the Energy Only
prototype
1
2
3
4
Next steps
Next steps: Study timing
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Appendix - Bibliography
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Thank you for your attention
32
Fabien Roques
Senior Vice President
COMPASS LEXECON
+33 1 53 05 36 29
Dmitri Perekhodtsev
Vice President
COMPASS LEXECON
dperekhodtsev@compasslexec
on.com
+33 1 53 05 36 29
Lion Hirth
Neon neue
energieökonomik GmbH
+49 157 55199715
