Electricity Market Design 2030-2050: Moving Towards Implementation

Climate change and ambitious emission-reduction targets call for an extensive decarbonization of electricity systems, with increasing levels of Renewable Energy Sources (RES) and demand flexibility to balance the variable and intermittent electricity supply. A successful energy transition will lead to an economically and ecologically sustainable future with an affordable, reliable, and carbon-neutral supply of electricity. In order to achieve these objectives, a consistent and enabling market design is required. The Kopernikus Project SynErgie investigates how demand flexibility of the German industry can be leveraged and how a future-proof electricity market design should be organized, with more than 80 project partners from academia, industry, governmental and non-governmental organizations, energy suppliers, and network operators. In our SynErgie Whitepaper Electricity Spot Market Design 2030-2050 [1], we argued for a transition towards Locational Marginal Prices (LMPs) (aka. nodal prices) in Germany in a single step as a core element of a sustainable German energy policy. We motivated a well-designed transition towards LMPs, discussed various challenges, and provided a new perspective on electricity market design in terms of technological opportunities, bid languages, and strategic implications. This second SynErgie Whitepaper Electricity Market Design 2030-2050: Moving Towards Implementation aims at further concretizing the future German market design and provides first guidelines for an implementation of LMPs in Germany. Numerical studies –while not being free of abstractions –give evidence that LMPs generate efficient locational price signals and contribute to manage the complex coordination challenge in (long-term) electricity markets, ultimately reducing price differences between nodes. Spot and derivatives markets require adjustments in order to enable an efficient dispatch and price discovery, while maintaining high liquidity and low transaction costs. Moreover, a successful LMP implementation requires an integration into European market coupling and appropriate interfaces for distribution grids as well as sector coupling. Strategic implications with regard to long-term investments need to be considered, along with mechanisms to support RES investments. As a facilitator for an LMP system, digital technologies should be considered jointly with the market design transition under an enabling regulatory framework. Additional policies can address distributional effects of an LMP system and further prevent market power abuse. Overall, we argue for a well-designed electricity spot market with LMPs, composed of various auctions at different time frames, delivering an efficient market clearing, considering grid constraints, co-optimizing ancillary services, and providing locational prices according to a carefully designed pricing scheme. The spot market is tightly integrated with liquid and accessible derivatives markets, embedded into European market coupling mechanisms, and allows for functional interfaces to distribution systems and other energy sectors. Long-term resource adequacy is ensured and existing RES policies transition properly to the new market design. Mechanisms to mitigate market power and distributional effects are in place and the market design leverages the potential of modern information technologies. Arapid expansion of wind andsolar capacity will be needed to decarbonize the integrated energy system but will most likely also increase the scarcity of the infrastructure. Therefore, an efficient use of the resource "grid" will be a key factor of a successful energy transition. The implementation of an LMPs system of prices with finer space and time granularity promises many upsides and can be a cornerstone for a futureproof electricity system, economic competitiveness, and a decarbonized economy and society. Among the upsides, demand response (and other market participants with opportunity costs) can be efficiently and coherently incentivized to address network constraints, a task zonal systems with redispatch fail at. The transition to LMPs requires a thorough consideration of all the details and specifications involved in the new market design. With this whitepaper, we provide relevant perspectives and first practical guidelines for this crucial milestone of the energy transition

Electricity Spot Market Design 2030-2050

Driven by the climate conference in Paris in December 2015 countries worldwide are confronted with the question of how to shape their power system and how to establish alternative technologies to reduce harmful CO2 emissions. The German government plans that even before the year 2050, all electricity generated and consumed in Germany should be greenhouse gas neutral [1]. To successfully integrate renewable energies, a future energy system must be able to handle the intermittent nature of renewable energy sources such as wind and solar. One important means to address such electricity production variability is demand-side flexibility. Here, industry plays a major role in responding to variable electricity supply with adequate flexibility. This is where the Kopernikus project SynErgie comes in with more than 80 project partners from academia, industry, governmental, and non-governmental organizations as well as energy suppliers and network operators. The Kopernikus project SynErgie investigates how to best leverage demand-side flexibility in the German industry. The current electricity market design in Germany is not well suited to deal with increasing levels of renewable energy, and it does not embrace demand-side flexibility. Almost 6GW of curtailed power in 2019 provide evidence that changes are needed with respect to the rules governing electricity markets. These rules were designed at a time when electricity generation was concentrated on a few large and dispatchable conventional power plants and demand was considered inelastic. The SynErgie Cluster IV investigates how a future-proof electricity market design should be organized. The corresponding Work Package IV.3.1 more specifically deals with analyzing and designing allocation and pricing rules on electricity spot markets. The resulting design must be well suited to accommodate demand-side flexibility and address the intermittent nature of important renewable energy sources. This whitepaper is the result of a fruitful collaboration among the partners involved in SynErgie Cluster IV which include Germany’s leading research organizations and practitioners in the field. The collaboration led to an expert workshop in October 2020 with participation from a number of international energy market experts such as Mette Bjørndal (NHH), Endre Bjørndal (NHH), Peter Cramton (University of Maryland and University of Cologne), and Raphael Heffron (University of Dundee). The whitepaper details the key recommendations from this workshop. In particular, the whitepaper recommends a move to a locational, marginal price-based system together with new bidding formats allowing to better express flexibility. We argue in favor of a one-step introduction of locational, marginal prices instead of repeatedly splitting existing zones. Frequent zone splitting involves recurring political debates as well as short- and long-run instabilities affecting the basis for financial contracts, for example. Importantly, the definition of stable prize zones is very challenging with increasing levels of distributed and renewable energy sources. The recommendation is the outcome of an intense debate about advantages and downsides of different policy alternatives. However, such a transition to locational, marginal prices is not without challenges, and it is a call to arms for the research community, policymakers, and practitioners to develop concepts on how to best facilitate the transition and ensure a reliable and efficient electricity market of the future

Electricity Market Design 2030-2050: Shaping Future Electricity Markets for a Climate-Neutral Europe

Speeding up the energy transition in the European Union (EU) is a major task to quickly reduce harmful greenhouse gas emissions. Market design plays a crucial role in the decarbonization of the European energy system, driving the expansion of both Renewable Energy Sources (RES) and accompanying flexibility sources. In particular, demand flexibility by energy-intensive industrial companies can play a key role. By flexibilizing their production processes, industrial companies can contribute to an increased use of variable RES (in the following referred to as Variable Renewable Energy (VRE)) to lower the CO2 footprint of their products with positive effects on economic competitiveness. Together with other flexibility sources like electric vehicles, the EU can transition to a just, low-carbon society and economy with benefits for all. However, to actually realize these benefits, market design must account for the changing production and consumption characteristics, e.g., the intermittency of VRE. Starting with current challenges of the energy transition that need to be solved with a future market designin the EU, the whitepaper takes alternative market design options and recent technological developments into account, which are highly intertwined. The whitepaper elaborates on the role of, for instance, flexibility, digital technologies, market design with locational incentives, and possible transition pathways in a European context. The “Clean energy for all Europeans” package offers a new opportunity to deepen the integration of different national electricity systems, whereby Transmission System Operators (TSOs) are required to reserve at least 70% of transmission capacities for cross-border trades from 2025 onwards. The corresponding scarcity of transmission capacities on the national level, however, may aggravate congestion to a critical extent, calling for transformational changes in market design involving, e.g., a redefinition of bidding zones close to the network-node level. The present whitepaper can be seen as part of a series of whitepapers on electricity market design 2030 - 2050 [14, 15] and continues the analysis of regionally differentiated prices or Locational Marginal Pricing (LMP) as a means to address congestion problems in future VRE-based electricity systems. Thereby, the whitepaper extends the findings of the previous two whitepapers (where in the latter whitepapers, e.g., a detailed discussion of the pros and cons of LMP can be found) and elaborates on the question how LMP could be implemented in one or several European countries and how possible implementation pathways may look like in a coupled European system. Moreover, the whitepaper describes preparatory steps that are necessary for the introduction of LMP, and – at the same time – create advantages for countries under both, a nodal and zonal market design. All in all, the results and outcomes of the whitepaper shall support the market design transition in Europe and, thus, the integration and activation of flexibility potentials to foster a fast reduction of CO2 emissions through a better use of VRE. Therefore, the whitepaper contributes with concrete policy measures to the overarching vision of a future European electricity market design that bases on low-carbon technologies and enhances welfare and fairness, while ensuring economic competitiveness of Europe. We would like to thank all the partners and are grateful for the financial support from the Federal Ministry of Education and Research as well as the Project Management Jülich. Martin Bichler, Hans Ulrich Buhl, and Martin Weibelzahl (SynErgie) Antonello Monti (OneNet

An analysis of a forward capacity market with long-term contracts

Open Access funded by VSNU, Under Creative Commons Attribution License (CC BY) 4.0. Available online 2 October 2017.We analyze the effectiveness of a forward capacity market (FCM) with long-term contracts in an electricity market in the presence of a growing share of renewable energy. An agent-based model is used for this analysis. Capacity markets can compensate for the deteriorating incentive to invest in controllable power plants when the share of variable renewable energy sources grows, but may create volatile prices themselves. Capacity markets with long-term contracts have been developed, e.g. in the UK, to stabilize capacity prices. In our analysis, a FCM is effective in providing the required adequacy level and leads to lower cost to consumers and more stable capacity prices, as compared to a yearly capacity market. In case of a demand shock, a FCM may develop an investment cycle, but it still maintains security of supply. Its main effect on the power plant portfolio is more investment in peak plant

The role of aggregators in facilitating industrial demand response : evidence from Germany

Industrial demand response can play an important part in balancing the intermittent production from a growing share of renewable energies in electricity markets. This paper analyses the role of aggregators - intermediaries between participants and power markets - in facilitating industrial demand response. Based on the results from semi-structured interviews with German demand response aggregators, as well as a wider stakeholder online survey, we examine the role of aggregators in overcoming barriers to industrial demand response. We find that a central role for aggregators is to raise awareness for the potentials of demand response, as well as to support implementation by engaging key actors in industrial companies. Moreover, we develop a taxonomy that helps analyse how the different functional roles of aggregators create economic value. We find that there is considerable heterogeneity in the kind of services that aggregators offer, many of which do create significant economic value. However, some of the functional roles that aggregators currently fill may become obsolete once market barriers to demand response are reduced or knowledge on demand response becomes more diffused

Simulating climate and energy policy with agent-based modelling : the energy modelling laboratory (EMLab)

We present an approach to simulate climate and energy policy for the EU, using a flexible and modular agent-based modelling approach and a toolbox, called the Energy Modelling Laboratory (EMLab). The paper shortly reviews core challenges and approaches for modelling climate and energy policy in light of the energy transition. Afterwards, we present an agent-based model of investment in power generation that has addressed a variety of European energy policy questions. We describe the development of a flexible model core as well as modules on carbon and renewables policies, capacity mechanisms, investment behaviour and representation of intermittent renewables. We present an overview of modelling results, ongoing projects, a case study on current reforms of the EU ETS, and we show their relevance in the EU context