Europe’s TSO association ENTSO-E presents options for the design of the region’s electricity markets to meet 2030 climate objectives.
Decarbonisation in the form of increasing variable renewable generation, digitalisation and greater decentralisation are transforming the power system. The question is how the electricity market should evolve to be fit for purpose in 2030 and beyond.
ENTSO-E has been taking a lead in this discussion with its One System Vision launched in 2017 and in the organisation’s newest contribution, it presents potential design options.
Previously ENTSO-E had concluded that a radical market design change was neither necessary nor desirable. The overall goal should be to foster an efficient internal market, considering national specificities and any solution for short term management should address the 2030 challenges.
General principles identified are better reflection of grid constraints in market operation, the increasing importance of close to real time markets and closer coordination between the TSOs and DSOs.
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The new discussion paper states that some of the challenges faced by TSOs are already very evident. Among these are the increasing gap between the market outcomes and the physical reality of the grids, challenges in determining optimal and widely acceptable bidding zone configurations, increasing loop flows, significant redispatching and countertrading needs and limited information available on power system flexibility.
The rapid evolution from traditional fossil fuels generation towards renewables also poses challenges to the capability of electricity markets to ensure resource adequacy, especially considering the increasing likelihood of extreme climatic events caused by climate change.
It is essential that the market design ensures that sufficient resources, either conventional generation, renewable generation, demand response or storage, are present in the system at all times, and especially when weather-dependent generation is scarce, says ENTSO-E.
At the wholesale market level, market rules, products and processes require adaptation to reflect the changing nature of participants from both the demand and supply sides, ENTSO-E says.
These include the emerging access of resources such as renewables, demand response and storage in wholesale market products and processes and the goal for consumers to become active prosumers.
The importance of intraday and balancing markets will increase as day-ahead markets will be less able to capture close to real-time outcomes and sudden changes in market conditions. A possible market design improvement would be to move to shorter resolution products jointly managed with larger resolution products and an increase in the number of intraday auctions coupled with increasing volumes traded shortly before real time.
The main market design options foreseen to ensure resource adequacy are enhanced energy only markets, capacity markets and strategic reserves. As market conditions differ between countries, it is unlikely that one option should be recommended over another for the whole of Europe.
Moreover, the continuous development in new technologies could lead to a change in the highest performing and most suitable market design option to be adopted within a single market.
ENTSO-E says it believes that electricity markets should be designed in the future to deliver more clear and effective locational signals, so as to help addressing the increasing challenges of grid congestions. Such locational signals could be delivered not only via the energy markets in wholesale prices but also via investment price signals such as capacity markets, strategic reserves or renewables support mechanisms.
This could imply, for instance, location-specific tenders, or differentiated prices or capacity requirements depending on the location.
Further analysis is needed to outline the different options and their pros and cons, but the approach deserves careful consideration as it has already been implemented in some countries, ENTSO-E says.
The discussion paper is out for consultation.