Abstract

This paper explains why current electricity markets are not fit for purpose and propose a new market design. Electricity markets operating today were designed for the technical and economic conditions of the 1990's. These conditions have changed substantially, especially with increased penetration of intermittent renewables and the growing potential for distributed energy resources and consumer involvement. Today's markets are incompatible with these trends. They do not provide helpful signals for investment, operations, demand response, system optimisation. Nor do they offer an exit from continued subsidies for renewables. To address these problems, we need a new market design. This paper outlines a "two market" model, separating the "as available" market from the "on demand" market, both at the wholesale and retail level. The as available market applies to renewable energy. The on demand market is for flexible plants needed to meet peak demand and to back up intermittent renewables Each market will have its own price.  The two market model emphasizes demand flexibility. It will enable consumers to choose what mix of energy they wish to purchase from the two markets; encourage them to shift their demand to the as available market (and to acquire storage and other load-shifting appliances); provide a market-basis for financing flexible plant; and offer an exit strategy for government subsidies to renewables and flexible plants.