A new report by the Regulatory Assistance Project (RAP) identifies how to adapt energy markets cost-effectively to meet Europe’s decarbonisation goals, while maintaining reliability. Power Market Operations and System Reliability in the Transition to a Low-Carbon Power System provides practical options for governments, regulators, and system operators to optimize electricity markets to deliver the right mix of low-carbon resources.

“The current debate over energy-only versus energy-plus-capacity markets misses the mark,” said Michael Hogan, RAP senior advisor and lead author of the report. “Least-cost solutions will be delivered not by markets that perpetuate investment in ‘more of the same,’ but rather by a market that shifts investment from the current resource mix, dominated by inflexible baseload generation, to a more flexible fleet capable of complementing production from a growing share of variable resources.”

The report offers three market design guidelines for a successful electricity market. First, due to the substantial overcapacity in most regions, policymakers must deliberately and selectively remove those resources no longer needed for security of supply and that are incompatible with environmental targets or do not contribute to the flexibility of the system.

“No market design will deliver a reliable, affordable solution unless this growing stock of excess capacity is permanently removed from the market,” cautioned Hogan.

Second, the report recommends designing market mechanisms to fully compensate both generation and demand-side resources for the flexible capabilities each provides. This can include fully pricing all energy market balancing decisions, including the effect of scarcity in balancing services, opening balancing markets to non-traditional service providers such as demand-response aggregators, and implementing locational pricing. Demand-side resources, including both energy efficiency and demand response, must be included in market mechanisms to ensure lowest-cost solutions.

Finally, the report argues for integrating market operations across the largest possible footprint. Larger balancing control areas can dramatically reduce the swings between resource surplus and resource scarcity. When combined with faster markets, which dispatch system resources as close to real time as possible, the need for system flexibility is reduced.

The report’s findings are highly relevant to addressing the challenges raised by the European Commission’s public consultation on how Europe’s electricity market should be redesigned in order to deliver the goals of the Energy Union strategy. These goals include delivery of 2030 climate and energy targets, empowerment of energy consumers, and ensuring that the European Union becomes the world leader in renewable energy.