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Electricity Market Design and RE Deployment (RES - E- MARKETS) Electricity Market Design and RE Deployment (RES - E- MARKETS) September 2016 A B O U T T H E I EA RET D TECHNOLOGY COLLABORATION PROGRA MME The IEA Renewable Energy Technology Deployment Technology Collaboration Programme (IEA RETD TCP) provides a platform for enhancing international cooperation on policies, measures and market instruments to accelerate the global deployment of renewable energy technologies. IEA RETD TCP aims to empower policy makers and energy market actors to make informed decisions by: (1) providing innovative policy options; (2) disseminating best practices related to policy measures and market instruments to increase deployment of renewable energy, and (3) increasing awareness of the short-, medium- and long-term impacts of renewable energy action and inaction. For further information please visit: http://iea-retd.org or contact [email protected]. Twitter: @IEA_RETD IEA RETD TCP is part of the IEA Energy Technology Network. DISCLAIMER The IEA RETD Technology Collaboration Programme, formally known as the Technology Collaboration Programme for Renewable Energy Technology Deployment, functions within a Framework created by the International Energy Agency (IEA). Views, findings and publications of IEA RETD TCP do not necessarily represent the views or policies of the IEA Secretariat or of its individual Member Countries. COPYRIGHT This publication should be cited as: IEA RETD TCP (2016), Electricity Market Design and RE Deployment (RES-E-MARKETS) [Fabien Roques, Dmitri Perekhodtsev (FTI-CL Energy), Lion Hirth (Neon)], IEA Renewable Energy Technology Deployment Technology Collaboration Programme (IEA RETD TCP), Utrecht, 2016. Copyright © IEA RETD TCP 2016 (Stichting Foundation Renewable Energy Technology Deployment) ACKNOWLEDGEMENTS The Authors would like to thank the IEA RETD TCP RES-E-MARKETS Project Steering Group (PSG) members for their guidance and support throughout the project, as well as the interview partners and supporting colleagues: Project Steering Group Louise Oriol Ministère de l’Ecologie, du Développement Durable et l’Energie, France Kristian Petrick Operating Agent IEA RETD TCP Michael Paunescu Natural Resources Canada, Canada Tracey Kutney Natural Resources Canada, Canada Simon Müller International Energy Agency AUTHORS Fabien Roques, Dmitri Perekhodtsev (FTI-CL Energy, www.compasslexecon.com, [email protected]) Lion Hirth (Neon Neue Energieökonomik GmbH, www.neon-energie.de) Notice: The views and analysis presented in this report are those of the FTI-CL Energy and Neon authors and not the views of FTI Consulting, Inc. or its management, its subsidiaries, its affiliates, or its other professionals. The authors of this work have used sources believed to be reliable in their efforts to provide information that is complete and generally in accord with the standards accepted at the time of publication. Neither the authors nor any party involved in the preparation or publication of this work warrants that the information contained herein is in every respect accurate or complete and do not assume responsibility for any errors or omissions or for the results obtained from use of such information. The authors expressly disclaim any express or implied warranty, including any implied warranty of merchantability or fitness for a specific purpose, or that the use of the information contained in this work is free from intellectual property infringement. This work and all information are supplied "AS IS." Readers are encouraged to confirm the information contained herein with other sources. The information provided herein is not intended to replace professional advice. The authors and the publisher make no representations or warranties with respect to any action or failure to act by any person following the information offered or provided within or through this work. The authors and the publisher will not be liable for any direct, indirect, consequential, special, exemplary, or other damages arising therefrom. Electricity Market Design and RE Deployment (RES-E-MARKETS), September 2016 TABLE OF CONTENTS 1. Executive Summary ...................................................................................................................... 1 1.1. Study objectives ........................................................................................................................ 1 1.1.1. Key challenges to power system with high shares of variable renewable energy sources 1 1.1.2. Diversity of power systems and the implications for market design ................................. 1 1.2. Policy recommendations ........................................................................................................... 2 1.2.1. High-level policy recommendations .................................................................................. 2 1.2.2. Recommendations for wholesale market design .............................................................. 4 1.2.3. Recommendations for retail market design ...................................................................... 6 1.2.4. Conclusion and recommendations for further work ......................................................... 7 2. Introduction: context and methodology ...................................................................................... 8 2.1. Context and motivations for the study ..................................................................................... 8 2.2. Objectives of the study ............................................................................................................. 9 2.3. Study approach ......................................................................................................................... 11 3. A theoretical framework for market design assessment .............................................................. 13 3.1. Introduction .............................................................................................................................. 13 3.2. What is “power market design”? .............................................................................................. 13 3.2.1. A definition of electricity market design ........................................................................... 13 3.2.2. Power market design a matter of public policy ................................................................. 15 3.2.3. The different time frames associated with electricity market design ............................... 15 3.2.4. Market design as a coordination and risk allocation mechanism ...................................... 16 3.3. Criteria for a benchmark ‘ideal’ market design......................................................................... 18 3.3.1. High level criteria for the benchmark market design ........................................................ 19 3.4. Diversity of power systems and the implications for market design ........................................ 20 3.4.1. The diversity of power systems and the challenges of high VRE shares ........................... 20 3.4.2. Degree of unbundling and market liberalisation ............................................................... 21 3.4.3. Physical characteristics of the system ................................................................................ 21 3.4.4. Power system prototypes considered ............................................................................... 21 4. Key challenges to power system with high shares of VRE ............................................................ 23 4.1. Introduction .............................................................................................................................. 23 4.2. Challenges of high shares of VRE to power systems and market design .................................. 23 4.2.1. Capital intensity and low marginal cost ............................................................................. 24 4.2.2. Variability and limited predictability .................................................................................. 29 4.2.3. Decentralised and scattered generation ............................................................................ 31 4.3. Specific criteria for a benchmark market design with high shares of VRE ................................ 33 5. Energy-only market ....................................................................................................................... 36 5.1. Introduction .............................................................................................................................. 36 5.1.1. Case study: energy-only market in Texas (ERCOT) ............................................................. 36 5.1.2. Case study: energy-only market in Australia (NEM) .......................................................... 37 5.1.3. Case study: European energy only markets ....................................................................... 37 5.2. Critical elements of the benchmark market design .................................................................. 37 5.3. Design of the energy and ancillary services markets ................................................................ 38 5.3.1. Benchmark market design ................................................................................................. 38 5.3.2. Bridging the gaps ............................................................................................................... 39 5.4. Locational price signals ............................................................................................................
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