Electricity Market Design and RE Deployment RES-E-MARKETS September 2016
Content 1. Context and methodology 2. A theoretical framework for market design assessment 3. Key challenges for power system with high shares of VRE 4. Energy only market 5. Vertically integrated utility 6. Hybrid market 7. Prosumer market 8. Policy recommendations www.iea-retd.org 2
1. Context and methodology www.iea-retd.org 3
FTI Consulting is a multidisciplinary international international consulting company. Neon is a specialised consulting boutique FTI Consulting activity Neon Consulting activity Neon is a Berlin-based boutique consulting firm for energy economics. We combine expertise on economic theory with advanced modeling capabilities and extensive industry experience. Neon specializes in six INTERNATIONAL SCOPE areas: Over 4,200 professionals in 24 countries on 6 continents 1. Market value of wind and solar power 2. (Whole) system costs PROFESSIONAL EXPERTISE 3. Balancing power Reputable consultants in a variety of domains 4. Market design with respect to international clients 5. Power market modeling ENERGY EXPERTISE 6. Training seminars FTI-CL Energy experts have advanced expertise in the issues of electricity market www.neon-energie.com design www.iea-retd.org 4
Project context: Toward high shares of renewables in the generation mix The Th e sha hare of of var aria iable le re renewable les (V (VRE) ) in n electric el icit ity gen generatio ion in n sele elected re regions • In a carbon-constrained world, variable renewables will supply a large share of electricity • IEA ETP 2014 2 degrees scenario: VRE represent 30- 45% in most world regions by 2050 (other studies provide similar estimates) Source: IEA (2014): Energy technology perspectives, 2DS scenario. www.iea-retd.org 5
The 3 stages of RES development Rising share of Renewables Supporting RES development Mainstreaming RES Design of RES support Design power market policies RES integration into market around RES RES on the side of power RE-design of support market Changes to market design mechanisms for high shares of RES Focus of Allowing phase out of this study support for mature Source: FTI-Cl Energy and NEON technologies • These challenges will play out differently depending on the power system organisation: • In jurisdictions with liberalised power sector: growing concern that competitive wholesale markets co- existing with policy support for VRE deployment may not provide a level playing field and may turn out unsustainable in the long-term • In jurisdictions with vertically integrated utilities or hybrid systems: increasing RES capacity run by independent power producers may require revisions of the regulations defining the rules for grid access and system operation, ensuring the level playing field between the IPPs and the incumbent • In jurisdictions with active prosumer participation : new questions emerge around the interface between retail and wholesale markets as well as on the regulation of distribution system operators www.iea-retd.org 6
Our approach: from the ideal market design toward transition pathways Inception Task 3 Task 1 Task 2 A variety of current market Policy Prototypes Transition Project designs recommandati and pathways phases Clustered case studies ons blueprints Analytical framework of Task 1 may be adjusted as a result of the results in Task 2 and 3 • Spot markets • Ancillary services • Int’l market integration Markets • Reducing time political risks scale • ... Policy making as a search process: gradual adjustments, stakeholder involvement, learning 2015 2016-2020 2020-2050 2050 tim ime / VRE VRE shar share Literature Bilateral Case study Methods Workshop reviews interviews analysis www.iea-retd.org 7
2. A theoretical framework for market design assessment www.iea-retd.org 8
The wide scope of market design and policy frameworks • Market design shapes the incentives Governance and institutional framework (roles of policy, independent regulator, etc.) under which all these decisions are taken • Market design consists of a set of rules RES support specified by policy and regulation at multiple layers implemented in a large number of different laws, administrative orders, and market provisions. Wholesale Retail market market Balancing and ancillary services Infrastructure regulation (transmission, distribution) Source: FTI-Cl Energy and NEON www.iea-retd.org 9
Market design is a coordination and risk allocation mechanism • Power prices are a decentralised coordination mechanism • Short term – Efficient dispatch of all generation units based on variable costs Long-term investment planning • Long term – Signal retirement or new investment, trigger new entrants Energy-only Decentralised • Vertical integration • Hybrid Historical approach – coordination of short term approaches dispatch and long term investment centralised Wholesale market with a capacity mechanism • Liberalised markets Centralised Decentralised • Wholesale marker prices coordinate market Investment markets Short- with tenders for term players’ actions – short and long term long-term contracts Centralised dispatch • Hybrids • Most markets still hybrids with some form of Vertically integrated regulatory intervention • Public intervention differs depending on Source: FTI-Cl Energy and NEON objective, type of intervention and risk allocation www.iea-retd.org 10
Criteria for ideal market design with high level of VRE Ultimate Economic welfare goal Constraints Policy objectives Operational constraints Wider energy system 1 2 3 4 5 Appropriate Appropriate High-level Efficient Pricing Efficient rent risk investment externalities criteria dispatch allocation allocation Environmental Investment Appropriate risk Robust to Dispatch signals externality signals allocation market power Coherence Minimizing Power system Ancillary Stranded assets short/long-term financing costs externalities services management Specific Geographical co- RES support Reducing policy criteria ordination schemes risk Locational Interface with signals other sectors Innovation incentives www.iea-retd.org 11
The diversity of power systems and implications for market design Single Buyer as a national genco, disco or disco, or a combined notional genco-transco or transco-disco + IPPs Vertically integrated monopolist Many discos and gencos, including IPPs, transco as a Single Vertically integrated monopolist + IPPs Buyer with Third-Party access Power market of gencos, discos and large users, transco and ISO www.iea-retd.org 12 Source: FTI-CL Energy analysis based on various sources including World Bank
Stylized models of power system organization: 4 different prototypes • Real-world market and policy design is diverse, complex, multi-level and path-dependent. • To address this diversity in a transparent way, we propose to study a small number of power system prototype s • Each real-world market represents a combination of these prototypes • Each prototype allows to focus on a specific aspect of market design Vertically Energy-only Hybrid Prosumer integrated Decentralised Centralised based Decentralised Decentralised Dispatch through wholesale on costs and other through wholesale through retail decisions market prices drivers market prices market prices Decentralised Centralised based Centralised based Decentralised Investment through wholesale on planning on planning through retail generation market prices and/or risk sharing market prices mechanism Texas , Australia, South Africa, US Brazil, UK Germany, Examples Europe Australia, California www.iea-retd.org 13
3. Key challenges for power system with high shares of VRE www.iea-retd.org 14
Three main challenges of VRE to power systems and market design Limited predictability and Decentralized and scattered Capital intensity variability generation • Coordination between • Cost recovery: Credible • Price volatility generation and grids investment incentives • More volatile prices • Increased investment • Credible investment signals • Product definition (e.g., demand requires new • Implications for the design peak/off-peak) looses approach to TSO and DSO of energy markets, capacity relevance regulation markets, support schemes • Locational price signals for • Spot market design generators needed • Cost of capital: limiting risk • Reduced gate closer exposure • Higher frequency • Prosumers • Exposure to risk, including • Both day-ahead and intra- • Retail prices becomes policy risk, is a day investment signal fundamental factor determining total system • Base for taxes and grid fee costs if the system is • Assurance of system stability erodes capital-intensive • Many small producers • Need for new AS products, • Trade-off between policy need access to wholesale e.g. providing system flexibility and regulatory markets inertia risk • Redesign AS to allow VRE participation www.iea-retd.org 15
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