IRENA HEADQUARTERS P.O. Box 236, AbuP.O. Dhabi United Arab Emirates www.irena.org © IRENA 2017 2017 ENERGY RENEWABLE VARIABLE OF SHARES HIGH TO DESIGN MARKET ADAPTING Executive 1. Power sector 2. Wholesale 3. Distribution networks 4. Conclusions and Summary transition market design and distributed resources recommendations ADAPTING MARKET DESIGN DESIGN MARKET ADAPTING VARIABLE RENEWABLE ENERGY RENEWABLE VARIABLE TO HIGH SHARES OF TO © IRENA 2017 Unless otherwise stated, material in this publication may be freely used, shared, copied, reproduced, printed and/or stored, provided that appropriate acknowledgement is given of IRENA as the source and copyright holder. Material in this publication that is attributed to third parties may be subject to separate terms of use and restrictions, and appropriate permissions from these third parties may need to be secured before any use of such material. 978-92-9260-025-9 (PDF) Citation: IRENA (2017), Adapting market design to high shares of variable renewable energy. International Renewable Energy Agency, Abu Dhabi ABOUT IRENA The International Renewable Energy Agency (IRENA) is an intergovernmental organisation that supports countries in their transition to a sustainable energy future, and serves as the principal platform for international co-operation, a centre of excellence, and a repository of policy, technology, resource and financial knowledge on renewable energy. IRENA promotes the widespread adoption and sustainable use of all forms of renewable energy, including bioenergy, geothermal, hydropower, ocean, solar and wind energy, in the pursuit of sustainable development, energy access, energy security and low-carbon economic growth and prosperity. ACKNOWLEDGEMENTS This report has been directed by Salvatore Vinci and Rabia Ferroukhi (IRENA) and has been authored by: Ignacio Pérez-Arriaga, Tomás Gómez, Carlos Batlle, Pablo Rodilla, Rafael Cossent, Ignacio Herrero, Inés Usera, Paolo Mastropietro (Comillas Pontifical University), Salvatore Vinci (IRENA); with the contribution of: José Pablo Chaves, Binod Prasad Koirala (Comillas Pontifical University); Federico Boschi; Bishal Parajuli (IRENA). The report benefited from input and review of experts: Pedro Linares (Comillas Pontifical University); Matthew Wittenstein (International Energy Agency); Marco Foresti (ENTSO-E); Christian Redl (Agora-Energiewende); Lori Bird, Jenny Heeter (NREL); Luiz Augusto Barroso (Empresa de Pesquisa Energética); Ruud Kempener (European Commission); Luca Lo Schiavo, Massimo Ricci (AEEGSI); Hannelore Rocchio; Henning Wuester, Sakari Oksanen, Paul Komor, Alvaro Lopez-Peña, Divyam Nagpal, Michael Taylor, Emanuele Taibi (IRENA). For further information: [email protected]. This report is available for download from www.irena.org/publications DISCLAIMER This publication and the material herein are provided “as is”. All reasonable precautions have been taken by IRENA to verify the reliability of the material in this publication. However, neither IRENA nor any of its officials, agents, data or other third-party content providers provides a warranty of any kind, either expressed or implied, and they accept no responsibility or liability for any consequence of use of the publication or material herein. The information contained herein does not necessarily represent the views of the Members of IRENA. The mention of specific companies or certain projects or products does not imply that they are endorsed or recommended by IRENA in preference to others of a similar nature that are not mentioned. The designations employed and the presentation of material herein do not imply the expression of any opinion on the part of IRENA concerning the legal status of any region, country, territory, city or area or of its authorities, or concerning the delimitation of frontiers or boundaries. FOREWORD he world has embarked upon a major energy transition which is bringing about profound changes in the ways electricity is produced, distributed, and Tconsumed. Renewable energy is at the centre stage of this transition. Fuelled by decreasing costs and improving technologies, renewable energy deployment has grown at an unprecedented pace. Each year, renewable power capacity additions set a new record, with over 160 GW added in 2016 alone. Still, the energy transition needs to happen faster for the world to meet key sustainable development and climate goals. The change will not happen merely with adjustments to the existing energy system, but through a paradigm shift across economies, societies and communities. Accelerating this transition requires a rethinking of electricity markets in many Adnan Z. Amin aspects, a key one being the adaptation of their design and operation to support Director-General higher shares of variable renewables –solar and wind energy – as well as distributed International Renewable power generation. Energy Agency In this context, this report presents the latest knowledge on the different options for the adaptation of liberalised electricity markets. Building on case studies from advanced markets, it identifies policy and regulatory measures needed to accommodate variable and decentralised renewables, while ensuring high standards of efficiency, reliability and environmental stewardship. The report highlights that regulations governing the electricity market must adapt to rapidly evolving needs and conditions in a timely manner. Enhanced flexibility for future power systems is an essential consideration. Electricity markets need to be re-designed to integrate all available resources, reward flexibility, and promote long- term investment. Modular, decentralised power generation requires new approaches to network regulation, advanced grid management methods and innovative metering technologies. Power sector regulation and renewable energy policy must work in tandem. They must reflect each country’s circumstances, ensuring reliable services at reasonable prices while sharing system costs and benefits fairly and equitably. “Adapting Market Design to High Shares of Variable Renewable Energy” offers recommendations for the entire power supply chain, from wholesale markets and system operations to distribution networks and end users. ADAPTING MARKET DESIGN I am confident that this report will prove useful, particularly as policy makers and TO HIGH SHARES OF regulators strive to transform the world’s power systems to achieve a sustainable VARIABLE RENEWABLE Aenergy Renewa future forbl all.e Energy Roadmap ENERGY ADAPTING MARKET DESIGN TO HIGH SHARES OF VARIABLE RENEWABLE ENERGY TABLE OF CONTENTS EXECUTIVE SUMMARY ........................................................ 10 01 POWER SECTOR TRANSITION ................................................ 18 1.1 The energy transition and its implications for the power sector ........................ 19 1.2 Power sector organisation ........................................................ 22 1.3 Renewable energy impact on the power sector operation. 24 1.3.1 System impacts of variable renewable energy .................................................. 25 1.3.2 Market impacts of variable renewable energy ..................................................26 1.4 Conclusions ..................................................................... 30 02 WHOLESALE MARKET DESIGN ............................................... 32 2.1 Introduction ..................................................................... 33 2.1.1 Electricity markets, products and time frames .................................................. 33 2.1.2 Why rethink the market now .................................................................. 35 2.2 Short-term markets .............................................................. 38 2.2.1 Time frames of markets, dispatches and prices .................................................40 2.2.2 Locational granularity of prices and schedules .................................................50 2.2.3 Bidding formats: fitting new necessities and resources .......................................... 52 2.2.4 Pricing and clearing rules ....................................................................58 2.2.5 Rethinking reserve requirements and procurement. 63 2.3 Balancing markets ............................................................... 67 2.3.1 Balancing responsibility and imbalance settlement .............................................68 2.3.2 Balancing products .........................................................................70 2.3.3 Reserve markets and pricing of the products .................................................. 75 2.4 Long-term support mechanisms .................................................... 75 2.4.1 Generation adequacy mechanisms and RES integration ......................................... 77 2.4.2 RES promotion mechanisms and wholesale market integration ..................................83 2.5 Conclusions and recommendations. .89 03 DISTRIBUTION NETWORKS AND DISTRIBUTED ENERGY RESOURCES . 90 3.1 Introduction. 91 3.2 Advanced solutions for distribution network planning and operation ................... 93 3.2.1 Proactive grid connection approach and long-term network planning .............................95 3.2.2 From reinforcement-based solutions to an active network operation .............................98 3.2.3 Paving the way through demonstration and pilot projects ......................................100 3.2.4 Conclusions and recommendations .......................................................... 104 4 3.3 Advanced