Electricity Market Design

Introduction

Electricity market design refers to the set of rules that govern how electricity is generated, transmitted, distributed, retailed and traded. Market design encompasses wholesale and retail market design, system services, and renewable support policies. Market design influences the decisions of market participants both in the long term—such as investments in, upgrades or retirement of capacity and infrastructure—and in the short term.

Electricity markets, including wholesale markets, energy imbalance markets, power exchanges, and bilateral programs exist around the world. In the face of the transition towards decentralized energy resources, market structures need to be continuously be updated to keep pace with technological advancements and policy shifts. Many countries are now experimenting with new market mechanisms such as capacity markets, real-time pricing, and ancillary services.

Regional markets imply harmonised rules in the wholesale market, ancillary service market and capacity markets across the region. By sharing resources over large regions, the need for operating reserves, as well as curtailment requirements and costs, are reduced.

Types of Electricity Markets

Ancillary Service Markets

Ancillary services are services necessary for the operation of a transmission or distribution system. Typical ancillary services are procured by transmission system operators and can be clustered into frequency ancillary services (balancing of the system) and non-frequency ancillary services (voltage control and black-start capability).

Ancillary services are usually bought and sold through specific ancillary service markets where grid operators can contract providers (such as conventional power plants, renewable sources, or battery storage) to supply these services. Market participants bid for contracts based on their ability to provide the necessary services when needed.

Capacity Remuneration Mechanisms (CRM)

The rapid expansion of renewable energy sources and their intermittent nature, combined with lower electricity prices due to their zero marginal cost of production, has resulted in reduced profitability for conventional power plants. In capacity markets, generators are paid to be available (even if not generating) to ensure reliable supply.

Innovations in Electricity Market Design

Time-of-use-tariffs (Smart Tariffs)

Time-of-use (ToU) tariffs provide a valuable mechanism for implicit demand response, which can help to manage the variability of solar and wind power. Customers can adjust their electricity consumption either manually or through automated systems to reduce their energy expenses, with TOU tariffs helping to level out demand. Price signals vary with time, based on short-term wholesale market and actual system balance. By unlocking demand-side flexibility, TOU tariffs help to increase renewable energy use.

Market Integration of Distributed Energy Resources

Demand response can be achieved through allowing distributed energy resources to participate in the wholesale market, being exposed to market prices (referred to as the explicit demand response). Besides load shifting, distributed energy resources also can provide ancillary services or electricity to the grid, increasing flexibility in the system while being remunerated for it.