The RAP paper “Beyond Capacity Markets” released April 2012 discussed reasons why, in power systems with large shares of variable renewable production, existing capacity market models may no longer be up to their intended task of driving the investments required to deliver least-cost reliability. This paper follows up on that analysis by addressing the question of what regulators and policymakers should do in response to these concerns.

Around the world, the ultimate aim of those involved in regulating a monopoly power sector or designing and overseeing competitive electricity markets is to find the set of rules and practices that efficiently and reliably delivers the right amount and the right mix of resources. Many different approaches have been taken and all have been subject to multiple revisions. The next challenge is to understand and address how the growing share of variable renewable production will require us to rethink our current practices. While many of the discussion points of this paper apply equally to all industry structures, our primary focus is on adapting competitive wholesale power markets to deliver their intended economic efficiency and reliability outcomes under this new resource paradigm.

Reliability has always involved two dimensions, but they have traditionally functioned in different timescales. Resource adequacy – access to enough firm resources to be able to meet the highest expected level of demand – has dominated planning at investment timescales. In contrast, system quality – the right mix of resource capabilities deployed to ensure that in every moment supply can be balanced with demand – has been the focus of services markets that have functioned primarily at operational timescales. While existing capacity market models are concerned only with resource adequacy, it is the system quality dimension that is fundamentally transformed by rising shares of variable renewables, making resource flexibility increasingly an investment consideration as well as an operational one.

This paper offers two market design models to deliver least-cost reliability in power systems with an increasing share of variable renewables. The paper also lays out the critical implementation steps as well as a decision framework for regulators and policy makers to use in thinking through the design and implementation of appropriate market mechanisms.