Electricity market design for the future

Abstract

This paper explains why current electricity markets are not fit for purpose and proposes 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 efficient signals for investment, operations, demand response or system optimisation. Nor do they offer an exit from continued subsidies for renewables and other plants. 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 mainly to intermittent renewable energy, especially wind and solar PV. The on demand market is for flexible plants, for instance based on natural gas, needed to meet peak demand and to back up intermittent renewables. Each of these two markets will have its own price at the wholesale level and the retail level.  The two market model emphasizes demand flexibility and consumer empowerment. It will enable consumers to choose what quantity and 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.