The interface between diversified policy incentives and electricity markets: Perspectives from a renewable energy power system evolution

Energy policy incentive mechanisms are widely implemented to facilitate the low-carbon transformation of the power sector, giving rise to increasingly complex hybrid market structures that extend beyond traditional energy-only market (EOM) designs. This paper examines the interaction and coupling effects among energy markets, tradable green certificates (TGC), carbon emission trading (CET), and capacity remuneration mechanisms (CRM) within the context of China's power sector reform. An adjusted levelized cost of electricity (LCOE) framework incorporating unified externalities is developed, and a multi-market equilibrium model is constructed to capture operational and investment decisions of generation companies (GENCOs) under interacting policy instruments. The framework is applied to a representative regional power system to simulate long-term structural evolution under alternative market combinations. Results show that policy instruments generate overlapping and sometimes conflicting incentives, affecting generation mix transformation, multi-market price dynamics, technology profitability, and revenue adequacy. These findings underscore the importance of coherent and coordinated policy design. Sustainable electricity market reform requires careful balancing of decarbonization goals, price stability, and investment incentives.