Opinion & Commentary

Electricity markets may need to change to support the clean energy transition

Electricity markets may need to change to support the clean energy transition
(Image by stanthonys solar from Pixabay)

Contributed by Rob Chapman, SVP Energy Delivery and Customer Solutions, EPRI

When new technology emerges in any sector, it often causes disruptions in the status quo. The energy industry is no exception. With decarbonization and electrification becoming top priorities for society, plus the rapid growth in renewable energy, industry leaders recognize that wholesale electricity markets may need to evolve more rapidly to keep pace with the changing energy landscape.

Around the world, energy systems are planned and operated in a way that maximizes economic efficiency and reduces costs while maintaining reliability and resiliency. Electricity markets were originally designed to align with the characteristics of centralized generation plants, such as those powered by coal, natural gas, or nuclear.

The design in use today can be traced to the 1990s when traditional generation sources had significant operating costs in the form of fuel. Centralized markets and advanced software would result in the dispatch of plants with the lowest operating costs to meet demand. The market prices and incentives would lead to procuring lower-cost fuel, more efficient conversion to electricity, and other innovations, with the goal of also lowering prices to customers.

However, hydropower, wind, and solar typically have lower operating costs as these sources do not purchase fuel. Wind and solar are so abundant at certain times of the day that they may drive the wholesale cost of electricity to zero or even negative, while energy storage has unique characteristics that can make market designers struggle to extract the most flexibility, value, and efficiency from this technology.

In the last decade, the proportion of electricity generated by wind and solar has more than quadrupled. The penetration of distributed energy resources is rapidly increasing as well. The pace of progress is giving rise to fundamental considerations in the way electricity markets work and how they should be structured in an industry undergoing transformative change.

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EPRI has been working with market operators and electric companies since the restructuring of electricity markets began in the late 1990s. The institute recently launched a new research program that explores electricity market design and operation with an emphasis on markets under future scenarios, such as decarbonization, electrification, increasing distributed energy resources (DERs), and growing adoption of price-responsive demand. Under the new program, EPRI is facilitating a collaborative forum that includes market operators from around the world in addition to key transmission and generating entities.

The research will focus on advanced analytics and modeling with tools and techniques that will allow energy companies to evaluate new features of evolving markets. Research areas include market design review, technology integration, reliability assurance, price formation, and future market scenarios. Emphasis will be placed on high-priority items, such as developing and testing new designs and software enhancements to evaluate which algorithms and designs can lead to economic efficiency and reliable solutions.

Given the role of clean energy in addressing decarbonization, it is critical that electricity market designs enable continued growth in the most efficient resources to meet evolving needs. If market prices are too low or too volatile, investors won’t have the incentive to finance new clean, dispatchable energy assets, especially those that can provide the needed reliability services for a grid in the midst of transition.

There is broad recognition that electricity markets are complex and continually changing to accommodate shifting priorities and integrate emerging technologies. These changes are viewed as necessary to better incentivize investment to optimize all available resources on the grid, including energy storage systems and distributed resources. Future technologies may include power flow control technologies, high-voltage direct current controllable lines, electrolyzers, long-duration energy storage, and others. There is also interest in creating incentives that enable a strong power system under extreme conditions.

Incremental changes to market rules and operational practices may be key to improving renewable generation integration in the near term. Solutions for transmission expansion and siting and interconnection process improvements will be important as well. But meeting clean energy targets for a zero-carbon power sector may require a faster pace, with little room for error. It is unclear whether existing market design can support this transition.

Researching new market solutions includes finding the right incentives for energy companies to build future generation, incentivizing efficient innovation, and appropriately valuing grid services. Technical solutions can be complemented by market solutions.

To achieve 80% to 90% clean energy goals by 2035 to 2040, market design research will likely need to accelerate to allow time for the extensive process that will turn ideas into action. Collaborative research that focuses on energy markets, ancillary service markets, capacity markets and resource adequacy mechanisms, financial transmission rights, and other features, such as emissions, is required to meet these goals. Understanding the differences across market regions, assessing the potential market outcomes under different scenarios using advanced techniques, and evaluating new designs for their reliability and efficiency gains will be critical for all stakeholders.

Originally published in Power Grid International.