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How Renewable Energy is Reshaping Europes Electricity Market Design

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  • L.J. De Vries and R.A. Verzijlbergh

Abstract

We present a systematic review of the challenges to the regulation of electricity markets that are posed by the integration of variable renewable energy sources. System integration is the key to developing the required flexibility, because flexibility options exist at all system levels and within the competitive as well as in the regulated (network) domains. The fluctuating nature of variable renewable energy changes the dynamics of investment decisions. We develop a framework for analysing relations between aspects of the regulation of the power sector that need to be coordinated in order to achieve (or at least improve) economic efficiency. We base the framework on the technical functionalities of the electricity infrastructure, which we group along three dimensions: system level (from retail/distribution to transmission/wholesale), geographic scope (the connection between electricity systems) and time scales (from real-time operations and balancing markets to the investment time scale). The framework helps identify regulatory challenges - potential inefficiencies due to a lack of coordination - and to place them into context. The picture that emerges from this approach is that the institutional fragmentation of the European electricity sector will become increasingly burdensome as the development variable renewable energy requires ever closer coordination between countries, between the different levels of the electricity system and between markets that serve different time scales. Interactions between elements of market design and regulation such as congestion management, renewable energy policy and system adequacy policy affect each other and are an additional reason for a system integration approach to regulation. Keywords: Electricity market design, renewable energy, flexibility, system integration

Suggested Citation

  • L.J. De Vries and R.A. Verzijlbergh, 2018. "How Renewable Energy is Reshaping Europes Electricity Market Design," Economics of Energy & Environmental Policy, International Association for Energy Economics, vol. 0(Number 2).
    • Handle: RePEc:aen:eeepjl:eeep7-2-devries
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    Citations

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    Cited by:

    1. Villalobos, Cristian & Negrete-Pincetic, Matías & Figueroa, Nicolás & Lorca, Álvaro & Olivares, Daniel, 2021. "The impact of short-term pricing on flexible generation investments in electricity markets," Energy Economics, Elsevier, vol. 98(C).
    2. Okur, Özge & Heijnen, Petra & Lukszo, Zofia, 2021. "Aggregator’s business models in residential and service sectors: A review of operational and financial aspects," Renewable and Sustainable Energy Reviews, Elsevier, vol. 139(C).
    3. Chyong, C. & Pollitt, M. & Cruise, R., 2019. "Can wholesale electricity prices support “subsidy-free” generation investment in Europe?," Cambridge Working Papers in Economics 1955, Faculty of Economics, University of Cambridge.
    4. Defeuilley, Christophe, 2019. "Energy transition and the future(s) of the electricity sector," Utilities Policy, Elsevier, vol. 57(C), pages 97-105.
    5. Finn Roar Aune & Rolf Golombek, 2020. "Are carbon prices redundant in the 2030 EU climate and energy policy package?," Discussion Papers 940, Statistics Norway, Research Department.
    6. Keppler, Jan Horst & Quemin, Simon & Saguan, Marcelo, 2022. "Why the sustainable provision of low-carbon electricity needs hybrid markets," Energy Policy, Elsevier, vol. 171(C).
    7. Thomas Pownall & Iain Soutar & Catherine Mitchell, 2021. "Re-Designing GB’s Electricity Market Design: A Conceptual Framework Which Recognises the Value of Distributed Energy Resources," Energies, MDPI, vol. 14(4), pages 1-26, February.
    8. Verástegui, Felipe & Lorca, Álvaro & Olivares, Daniel & Negrete-Pincetic, Matias, 2021. "Optimization-based analysis of decarbonization pathways and flexibility requirements in highly renewable power systems," Energy, Elsevier, vol. 234(C).

    More about this item

    Keywords

    electricity market design; renewable energy; flexibility; system integration;
    All these keywords.

    JEL classification:

    • F0 - International Economics - - General

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