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Steering Electricity

Markets Towards a Rapid

Decarbonisation

The IEA examines the

full spectrum

of energy issues

including oil, gas and

coal supply and

demand, renewable

energy technologies,

electricity markets,

energy efficiency,

access to energy,

demand side

management and

much more. Through

its work, the IEA

advocates policies that

will enhance the

reliability, affordability

and sustainability of

energy in its

31 member countries,

11 association countries

and beyond.

Please note that this

publication is subject to

specific restrictions that limit

its use and distribution. The

terms and conditions are

available online at

www.iea.org/t&c/

This publication and any

map included herein are

without prejudice to the

status of or sovereignty over

any territory, to the

delimitation of international

frontiers and boundaries and

to the name of any territory,

city or area.

Source: IEA. All rights

reserved.

International Energy Agency

Website: www.iea.org

IEA member

countries:

Australia

Austria

Belgium

Canada

Czech Republic

Denmark

Estonia

Finland

France

Germany

Greece

Hungary

Ireland

Italy

Japan

Korea

Lithuania

Luxembourg

Mexico

Netherlands

New Zealand

Norway

Poland

Portugal

Slovak Republic

Spain

Sweden

Switzerland

Republic of Türkiye

United Kingdom

United States

The European

Commission also

participates in the

work of the IEA

IEA association

countries:

Argentina

Brazil

China

Egypt

India

Indonesia

Morocco

Singapore

South Africa

Thailand

Ukraine

INTERNATIONAL ENERGY

AGENCY

Steering Electricity Markets Towards a Rapid Decarbonisation Abstract

PAGE | 3

Abstract

Achieving net zero emissions by 2050 will require a significant reduction in

electricity sector emissions, with around half of these coming from systems that

currently have liberalised electricity markets. In order to support a rapid

decarbonisation of power systems, the design of these markets will need to evolve

to ensure that they maximise the value delivered by existing and new low-carbon

technologies. When policymakers design electricity markets, they need to

consider the interactions between all parts of the market including wholesale, retail

and capacity markets. At the same time, it is essential to ensure synergies with

low-carbon investment frameworks and other decarbonisation policies.

This report identifies key principles for designing different parts of the market-

based on evidence from electricity markets globally and provides actionable

guidelines to help policy makers match decarbonisation pledges with actions. With

short-term wholesale markets as the starting point for generating efficient price

signals, the report systematically considers the different parts of electricity

markets, perspectives for integrating technologies such as distributed resources

and storage, and how the design process fits with other decarbonisation policies

and system planning. The principles derived from this analysis provide policy

makers with market design tools in the context of new technologies and

low-carbon transitions.

/115

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SteeringElectricityMarketsTowardsaRapidDecarbonisationTheIEAexaminesthefullspectrumofenergyissuesincludingoil,gasandcoalsupplyanddemand,renewableenergytechnologies,electricitymarkets,energyefficiency,accesstoenergy,demandsidemanagementandmuchmore.Throughitswork,theIEAadvocatespoliciesthatwillenhancethereliability,affordabilityandsustainabilityofenergyinits31membercountries,11associationcountriesandbeyond.Pleasenotethatthispublicationissubjecttospecificrestrictionsthatlimititsuseanddistribution.Thetermsandconditionsareavailableonlineatwww.iea.org/t&c/Thispublicationandanymapincludedhereinarewithoutprejudicetothestatusoforsovereigntyoveranyterritory,tothedelimitationofinternationalfrontiersandboundariesandtothenameofanyterritory,cityorarea.Source:IEA.Allrightsreserved.InternationalEnergyAgencyWebsite:www.iea.orgIEAmembercountries:AustraliaAustriaBelgiumCanadaCzechRepublicDenmarkEstoniaFinlandFranceGermanyGreeceHungaryIrelandItalyJapanKoreaLithuaniaLuxembourgMexicoNetherlandsNewZealandNorwayPolandPortugalSlovakRepublicSpainSwedenSwitzerlandRepublicofTürkiyeUnitedKingdomUnitedStatesTheEuropeanCommissionalsoparticipatesintheworkoftheIEAIEAassociationcountries:ArgentinaBrazilChinaEgyptIndiaIndonesiaMoroccoSingaporeSouthAfricaThailandUkraineINTERNATIONALENERGYAGENCYSteeringElectricityMarketsTowardsaRapidDecarbonisationAbstractPAGE3IEA.Allrightsreserved.AbstractAchievingnetzeroemissionsby2050willrequireasignificantreductioninelectricitysectoremissions,witharoundhalfofthesecomingfromsystemsthatcurrentlyhaveliberalisedelectricitymarkets.Inordertosupportarapiddecarbonisationofpowersystems,thedesignofthesemarketswillneedtoevolvetoensurethattheymaximisethevaluedeliveredbyexistingandnewlow-carbontechnologies.Whenpolicymakersdesignelectricitymarkets,theyneedtoconsidertheinteractionsbetweenallpartsofthemarketincludingwholesale,retailandcapacitymarkets.Atthesametime,itisessentialtoensuresynergieswithlow-carboninvestmentframeworksandotherdecarbonisationpolicies.Thisreportidentifieskeyprinciplesfordesigningdifferentpartsofthemarket-basedonevidencefromelectricitymarketsgloballyandprovidesactionableguidelinestohelppolicymakersmatchdecarbonisationpledgeswithactions.Withshort-termwholesalemarketsasthestartingpointforgeneratingefficientpricesignals,thereportsystematicallyconsidersthedifferentpartsofelectricitymarkets,perspectivesforintegratingtechnologiessuchasdistributedresourcesandstorage,andhowthedesignprocessfitswithotherdecarbonisationpoliciesandsystemplanning.Theprinciplesderivedfromthisanalysisprovidepolicymakerswithmarketdesigntoolsinthecontextofnewtechnologiesandlow-carbontransitions.SteeringElectricityMarketsTowardsaRapidDecarbonisationAcknowledgementsPAGE4IEA.Allrightsreserved.AcknowledgementsThereportwasconductedundertheguidanceofCésarAlejandroHernándezAlva,HeadoftheRenewablesIntegrationandSecureElectricity(RISE)Unit.KeisukeSadamori,DirectorofEnergyMarketsandSecurity(EMS)attheIEAprovidedexpertcommentsandseniorguidance.Thereportwasledandco-ordinatedbyPabloHevia-Koch.ThemainauthorsarePabloHevia-Koch,KeithEverhart,EnriqueGutiérrez,JuliaGuyon,LuisLopezandJacquesWarichet.ZoeHungerfordwasavaluablecontributortothisreport.PaoloFrankl,PeterFraser,SylviaBeyer,PaulineHenriot,StefanLorenczikandVidaRoziteprovidedvaluableinputandadvice.TheauthorswouldalsoliketothankMarilynSmithforskilfullyeditingthemanuscriptandtheIEACommunicationandDigitalOffice,Wewouldalsoliketothanktheexternalreviewers,including:DougArentNationalRenewableEnergyLaboratory,UnitedStatesofAmericaManuelBaritaudEuropeanInvestmentBankNormanBayWillkieFarr&GallagherMarkusBeckerGeneralElectricRinaBohleZellerVestasRomainCapaldiGuidehouseRebeccaCollyerEuropeanClimateFoundationEnriqueDeLasMorenasMoneoEnelLaurensDeVriesDelftUniversityofTechnologySteeringElectricityMarketsTowardsaRapidDecarbonisationAcknowledgementsPAGE5IEA.Allrightsreserved.FilippoGaddoArupCraigGlazerPJMInterconnectionMichaelGrubbUCLRenatoHaddadEmpresadePesquisaEnergética,BrazilEdwinHaesenENTSO-ESommerHenrikeAuroraEnergyResearchMichaelHoganRegulatoryAssistanceProjectVasilikiKlonariWindEuropeJeanMichelGlachantEuropeanUniversityInstituteSumieNakayamaJ-POWERMagnusOlofssonSvenskaEnergiinstitutetMichaelPaunescuNaturalResourcesCanadaChristophRiechmannFrontierEconomicsFereidoonSioshansiMenloEnergyEconomicsElisabethLaRoseGeneralElectricChristianNabeGuidehouseTheindividualsandorganisationsthatcontributedtothisstudyarenotresponsibleforanyopinionsorjudgmentsitcontains.AllerrorsandomissionsaresolelytheresponsibilityoftheIEA.SteeringElectricityMarketsTowardsaRapidDecarbonisationTableofcontentsPAGE6IEA.Allrightsreserved.TableofcontentsExecutivesummary..................................................................................................................8Chapter1.Optimisingwholesalemarkets...........................................................................18Short-termwholesalemarketsrevealthesystemvalueofresourcesthroughpricesignals...18Marketdesignmustbalanceplanningandadaptability...........................................................20Designingmarketstocapturevaluefromlow-carbontechnologies........................................24Finalrecommendations............................................................................................................32Chapter2.Marketinstrumentstoacceleratedecarbonisation.........................................33Leveragingwholesalemarketsandsupportpoliciesiskeytoacceleratedecarbonisation.....33Carbonpricingiskeytovaluinglow-carbontechnologies.......................................................34VREsupportschemesneedtoencouragelong-termcertaintyandsystemintegration..........37Decarbonisationinstrumentsshouldencourageinvestmentsofhighestvaluetopowersystems....................................................................................................................................39Long-termauctionsproviderevenuecertaintyandallowgeneratorstorevealrequiredlevelofsupport.........................................................................................................................41Technology-specificandneutralmechanismsdeliverdifferentoutcomesintermsofcostandinnovation..........................................................................................................................42Market-basedmechanismscanprovideabetterpictureofwhattechnologiesbringmostvaluetothesystem..................................................................................................................43Marketinstrumentdesignshouldreflectpolicyobjectives.......................................................44Adaptingmarketinstrumentswillbeessentialtoensureinvestmentinlow-carbondispatchabletechnologies........................................................................................................45Finalrecommendations............................................................................................................46Chapter3Distributedenergyresources...............................................................................48DERreshapethestructureandoperationofelectricitymarkets.............................................48RapidDERdeploymentinducesashifttowardsthedistributiongrid......................................49CapturingthevalueDERservicesbringtothegrid.................................................................51RecommendationsforDER-optimisedmarketdesign.............................................................55Finalrecommendations............................................................................................................61Chapter4.Storageindecarbonisingpowersystems........................................................63Takingadvantageofstoragefordecarbonisation....................................................................63Valueofstorageandtrendsindeployment.............................................................................64Marketdesignforcost-effectivestoragedeployment..............................................................67Finalrecommendations............................................................................................................74Chapter5.Adequacymechanisms.......................................................................................76Ensuringsystemsecurity.........................................................................................................76Waystoaddressthemissingmoneyproblem.........................................................................79Finalrecommendations............................................................................................................88SteeringElectricityMarketsTowardsaRapidDecarbonisationTableofcontentsPAGE7IEA.Allrightsreserved.Chapter6.Retailmarketregulation......................................................................................89Protectingconsumerswhileencouraginginnovation...............................................................89Whyelectricityisunique...........................................................................................................90Time-varyingratescanlowerbillsandincreasesystemefficiency.........................................91Butretailmarketsshouldalsoprotectconsumers...................................................................92Recenteventspromptare-thinkofretailmarketpoliciesinmanycountries..........................94Whenextremepricesgetpassedontoconsumerbills...........................................................95Finalrecommendations............................................................................................................96Chapter7.Electricitysystemplanning................................................................................97Planningcreatestheframeworkwithinwhichmarketsoperate...............................................97Planningsetsthepathformarketsandpolicies......................................................................98Theevolvingcontextischallengingtraditionalplanningapproaches…...............................100…butseveralgoodpracticesareemerging..........................................................................101Finalrecommendations..........................................................................................................112SteeringElectricityMarketsTowardsaRapidDecarbonisationExecutivesummaryPAGE8IEA.Allrightsreserved.ExecutivesummaryElectricityplaysavitalroleinachievingnetzeroemissionsby2050Theelectricitysectorhasgrowntobeoneofthemostimportantsourcesofenergy.In2020,globalelectricitydemandwas23230TWh,20%oftotalfinalenergyconsumptionanditsgenerationproduced40%oftotalenergy-relatedCO2emissionsglobally,makingitthesinglelargestsourceofsuchemissions.By2050,assectorsthatcurrentlyrelyonfossilfuelsbecomeelectrified,demandisexpectedtomorethandoubleto60000TWh.Inlightofstatedglobalclimatechangegoals,decarbonisingtheelectricitysectoriscentraltoachievingnetzeroemissionsby2050.IntheIEA’sNetZeroEmissionsby2050Scenario,emissionsfromelectricitygenerationfalltozero(inaggregate)inadvancedeconomiesinthe2030s,withemergingmarketanddevelopingeconomiesachievingthisgoalaround2040.Makingthisscenarioarealityrequiresaccelerateddecarbonisationofthesector.TotalCO2emissionspersector,NetZeroEmissionsScenario,2010-2050IEA.Allrightsreserved.Source:IEA(2021),NetZeroby2050.-505101520102020203020402050GtCO₂PowerBuildingsTransportIndustryOtherSteeringElectricityMarketsTowardsaRapidDecarbonisationExecutivesummaryPAGE9IEA.Allrightsreserved.Expansionofgenerationfromrenewablesisexpectedtocontributethemosttodecarbonisationofelectricity,outputfromthesesourcesalmosttriplingby2030andgrowingeightfoldby2050–drivenmostlybysignificantdeploymentofvariablerenewableenergy(VRE)suchassolarphotovoltaics(PV)andwind.Otherlow-carbongeneration(suchasnuclearandhydrogen)andflexibility-providingtechnologies(e.g.batterystoragesystemsanddemandresponse)willalsoplayleadrolesinthepathtowardsnetzeroemissions.ElectricitymarketsarecentraltodecarbonisingthesectorAtpresent,around50%ofelectricityintheworldisgeneratedinpowersystemsrelyingonliberalisedmarkets;thiswillincreasetoapproximately76%oncethePeople’sRepublicofChina(“China”hereafter)completesimplementingpowermarkets.Assuch,muchoftheaccelerateddecarbonisationwillhavetobestimulatedintheshortandmediumterminsystemsthatrelyonelectricitymarketstominimiseoperationcostsand–tovaryingdegrees–toattractinvestments.Statusofelectricitymarketsaroundtheworldin2022IEA.Allrightsreserved.SteeringElectricityMarketsTowardsaRapidDecarbonisationExecutivesummaryPAGE10IEA.Allrightsreserved.Marketforcescansupportdecarbonisationofthepowersectorwhenguidedandcomplementedbytheimplementationofpoliciesdesignedtomatchnetzeroambition,includingeffectiveinvestmentframeworks,carbonpricingandotherdecarbonisationinstruments.Asinanyothermarket,asociallyoptimalequilibriumcanonlybeachievedifallparticipantsaremaderesponsibleforallcostsandbenefitsarisingfromtheiractions.Thisisthemechanismbywhichmarketscanprovidepricesignalsthatfunctionasincentives(ordisincentives)toguidethedecisionsofmarketactors.Inthecontextofdecarbonisation,suchpricesignalsarenotyetoptimallyaligned.Inmostpowersystemsintheworld,whetherco-ordinatedbyelectricitymarketsorbyverticallyintegratedutilities,externalitiesduetoCO2emissionsarenotcompletelyincludedaspartofpowersectorcosts.Thiscreatessubstantiallydistortedpricesignalsthatmakeinvestmentsinandoperationofcarbon-intensivetechnologiesmoreprofitablethantheyshouldbe,anddonotproperlyrecognisethevalueoflow-carbontechnologies.MarketdesignneedstobeabletoadapttochanginglandscapesOverthepastseveraldecades,liberalisationofelectricitymarketshasbeenusedasamechanismtoensureefficientdispatchingofresourcesinlinewithdemandandtoobtainbenefitsfromcompetitioninsystemoperationandinvestment.Sincethecreationofthefirstliberalisedelectricitymarket–in1982inChile–thedesignofmarketshascontinuouslyevolvedandmatured.Thisdoesnotmeanelectricitymarketdesignhasbeensolvedorthatanysolutioncouldbestaticinnature.Ongoingchangesinpolicyandtechnologyrequirethatmarketsbedesignedtoadapttonewlandscapes.Thisisparticularlytrueinthecontextofshort-andmedium-termaccelerationofdecarbonisationoftheelectricitysector.Procurementofsystemservicesisanexampleofthischange.AselectricitysystemstransitionawayfromfossilfuelgenerationtohighersharesofVRE,ensuringsecuresystemoperationwillneedtobebasedonadifferentconfigurationofdifferentcomponents.Thefundamentalservicesofenergy,flexibility,peakcapacityandstabilitywillhavetobeprocuredtosufficientlevelsbyusingallavailabletechnologies.Inturn,theassetsneededandtheirrespectivevaluetosystemswillevolve.VREforinstance,canprovidesubstantialvolumesofclean,low-costenergybutcontributesmuchlesstofirmcapacity.Incontrast,despitenotprovidinganet-positiveenergycontribution,energystoragecancontributetorampingflexibilityandadequacy.SteeringElectricityMarketsTowardsaRapidDecarbonisationExecutivesummaryPAGE11IEA.Allrightsreserved.Powersystemservicesinhighlydecarbonisedscenarios,Koreaannouncedpledgesscenario,2020and2035IEA.Allrightsreserved.Note:Stabilityisrepresentedbysysteminertia.Source:IEA(2021),ReformingKorea'sElectricityMarketforNetZero.ExperienceshowshowelectricitymarketdesigncanbechangedtohelpdecarbonisationAlthoughthereisnoperfectmarket,severalexperiencesindicatethemainelementsofmarketdesignthatcanbringthepowersectorontracktoachievenetzeroemissions.Redesignofshort-termwholesalemarketstointegratelargesharesofVREandopenopportunitiesformoderntechnologiestoprovideflexibility.Creationorredesignofinvestmentframeworksandpolicyinstrumentstoenabledeployinglargeramountsoflow-carbonelectricitygenerationandtoenablenewtechnologiestoparticipateinthemarkets.Introductionofcarbonpricingtocorrectdistortionsduetothelackofrecognitionofthecostscreatedbygreenhousegas(GHG)externalities.Inmostsystems,thissignalisstillverylowcomparedtoestimatesoftheactualsocialcostscreatedbyGHGs.Strengthenadequacymechanisms,providingincentivestoallresourcescapableofdeliveringenergyintimesofdistressofthesystemThisreportcollectsevidencefromelectricitymarketsaroundtheworldtoidentifyseveralinnovationsinmarketdesignandinvestmentframeworksthatprovidepolicymakerswithimmediateactionableideastosupportatransitiontoaflexible,decarbonisedandaffordablepowersector.Italsodrawsattentiontoapproachesthatsynergisewithdecarbonisationinothersectors.TheseexperiencesrepresentSteeringElectricityMarketsTowardsaRapidDecarbonisationExecutivesummaryPAGE12IEA.Allrightsreserved.examplesofoneormoreofthepreviouslymentionedfundamentalelements.Individuallyandcollectively,theyprovidepowerfultoolsthatwillhopefullyempowerpolicymakerstomatchpledgeswithactions.Providedthatallgovernmentsstrengthentheirenergyandclimatepoliciestomeetclimateambitions,electricitymarketscouldfunctionasatooltosignificantlysupportdecarbonisationpathways,particularlywhensynergisedwithabroaderportfolioofpoliciesandregulations.Marketdesignwillneedtokeepevolvingandtoberevisedtostayonthepathtowardsnetzeroemissionsby2050.Wehopethattheexperiencespresentedherewillserveasthebuildingblocksforrapiddecarbonisationofelectricitysystems.Short-termwholesalemarketdesignisfirststeptowardsestablishingefficientpricesignalsWholesalemarketsenablethetradingofenergybetweenmarketplayersatdifferenttimescales;assuch,theyarethecornerstoneofsuccessfulmarketdesign.Well-designed,short-termwholesalemarketsarefundamentaltobeingabletoleveragetheadvantagesofcompetitioninelectricityproductionandconsumptionwhilesynergisingwithandsupportingaccelerateddecarbonisationofthesector.Establishingefficientpricesignalscanprovideincentivestomarketactorstoaligntheirdecisionswiththeneedsofthesystem.Theoverarchingaimistoensurethatpricesignalsrepresenttherealityofthesystemandthattheyrewardservicesthatprovidevaluetoit.Thesepricesignalsareessentialtohighlighttheneedsofthesystem.Examplesofparticularvaluetosystemdecarbonisationincludegenerationattimesofhighdemand,lowercarbonemissionsandflexibilitytomodifylevelsofgenerationorconsumptioninresponsetosystemneeds.Astechnologyevolvesandtheneedsofthesystemchange,itisnecessarytoadaptthedesignofthewholesalemarkettoensurethatpricesignalscontinuetocorrectlyrepresenttheneedsofthesystemandrewardthevalueprovidedbydifferentassets.Wholesalemarketsshouldbedesignedsuchthatpricesignalsensureimprovedrepresentationofthetimeandgeographicalvalueofenergy.Thiscanbeachievedthroughincreasedtimeresolution,movinggateclosuretimesclosertothehourofdelivery,andapplyingamarketmodelthatcorrectlyrepresentstheunderlyingphysicalinfrastructure.Additionally,toensureefficientsystemoperation,itisSteeringElectricityMarketsTowardsaRapidDecarbonisationExecutivesummaryPAGE13IEA.Allrightsreserved.importanttomakesurelong-termcontractssupportriskhedgingandinvestments,butdonotimpedeoptimaldispatchonshort-termwholesalemarkets.EmbeddingdecarbonisationinstrumentsincompetitivemarketsAmongdecarbonisationtechnologies,windandsolarPVhavebecomethemostcost-competitive.Currentelectricitymarketsandregulations,however,havenotmanagedtostimulatesufficientinvestment.Toacceleratedeploymentoflow-carbonelectricity,itisnecessarytoclosetheinvestmentgapbyreflectingthecostofnegativeexternalitiesandintroducingadditionaldecarbonisationmechanismsthatarecompatiblewithbothwholesalemarketsignalsandotherpolicyinstruments.Severaldecarbonisationinstrumentsfacilitateintegrationwithcompetitivewholesalemarketrevenueswhilereducingtheoverallcostburdenthatgetspassedontoconsumers.Toimplementthesedecarbonisationmechanismscorrectlyandefficiently,marketdesignneedstobalanceprovidingrevenuecertaintythroughlong-termsignalswhileencouragingefficientintegrationinday-to-daypowersystemoperations.Inthecomingyears,asVREcomestoaccountforthemajorityshareingeneration,itwillbeimportanttointroducemarket-basedinstrumentstoensuresufficientinvestmentindispatchablelow-carbonassets.Toachievethis,policymakerswillneedtointroduceinstrumentsthatrewardtheprovisionofservicessuchasflexibilityandadequacywhilemaintainingtheefficiencyofthewholesalemarket.MaximisingthevalueofdistributedenergyresourcesrequireschangingcurrentmarketstructuresThediversificationandaccelerateddeploymentofdistributedenergyresources(DER)worldwideisshiftingelectricitysystems.Thepastmodelofcentralised,largegeneratorsconnectedtotransmissionnetworkswithlittledemand-sidecontrolisnolongerreflectiveofhowmodernsystemsfunction.Theemergenceofdecentralisedsystems,withmanydistributedresourcesthataresmallerandinterconnected,allowsbothendusedevices(e.g.appliances)andconsumerstohavemoreactiveroles.Ifdeployedefficiently,DERofferlargepotentialtosupporttheintegrationofVRE,increasesystemresilienceandreducetheneedforgridupgrade.Inadditiontoprovidingdemand-sideresponse,someDERassetscansupplyancillaryservicesSteeringElectricityMarketsTowardsaRapidDecarbonisationExecutivesummaryPAGE14IEA.Allrightsreserved.assourcesofflexibility,blackstartservicesandnon-wirealternatives.TomaximisethebenefitsofDER,itisnecessarytoadaptmarketstorewardtheirtruevalue.Indeed,undercurrentmarketstructuresinwhichsystemoperatorsoftenlackvisibilityofDER,itsdeploymentcancreateissuesandincentiviseinefficientbehavioursbyassetoperators,particularlyconsideringtheincreasedelectrificationthatresultsinhigherpeakloadsandcongestionsofdistributiongrids.EnsuringelectricitymarketsarereadytoletDERplaytheirroleisthereforehighlyrecommended.TomakeDERvisibletosystemoperators,digitalisationshouldbeencouraged.Thisimpliesdeploymentofconnectedappliancesandsmartmeteringinfrastructure,supportedbyeffectivedataexchangestructuresandappropriatedataprivacymeasures.Digitalinfrastructurewillfacilitatethedesignofelectricitytariffsthatreflectthelocationalandtime-variantvalueofelectricityandensureafairrepartitionofgridcosts,therebyensuringoptimaluseofDER.Inaddition,policymakersshouldreviewconnectionschemesandparticipationrulesandacknowledgetheroleofaggregatorswhilefacilitatingtheirinvolvement.Lastly,co-operationprotocolsamongstakeholders(particularlytransmissionanddistributionsystemoperators[TSOsandDSOs])andgridoperationprocesseshavetobeadaptedtotheDER-inducedshiftfromthetransmissiontothedistributionsystem.MarketdesignmustrecognisetheuniqueroleofstoragetoleverageitsadvantagesCostreductionsinenergystoragetechnologies,especiallybatterystorage,haveresultedinincreaseduptakeinvariousdomainsofthepowersystem.Tosupportitsfurtherdeploymentandensurethesystemvalueofstorageismaximisedtosupportdecarbonisation,marketdesignchangesmustconsideritsuniqueroleandtechnologicaladvantages.Storageisuniqueinitsabilitytoprovideflexibilitythroughbothloadandgeneration,acrossabroadrangeoftimescales.Asitcannotdecarbonisethepowersystemonitsown,storagemustbepartofapackageofmeasuresthataimstoalignmarketincentivesandthegenerationmixtowardsdecarbonisationtoavoidworseemissionsoutcomes.Taxationandnetworktariffsmustalsobeadaptedtoappropriatelyrecogniseitsroleasaflexibilityprovider,ensuringitisnotchargedtwiceasaconsumerandasagenerator.Finally,specificationsformarketparticipationmustevolveawayfromthepropertiesofconventionaltechnologiestowardstechnologicallyneutralonesthatuse(andappropriatelyremunerate)thesystemservicesofstorage.Designchangestorewardtechnologicaladvantagesofstoragecouldfocusonfast-responsetimeandgeographicflexibility.RemuneratingfastresponsecouldSteeringElectricityMarketsTowardsaRapidDecarbonisationExecutivesummaryPAGE15IEA.Allrightsreserved.beachievedthroughshortertimeperiodsornewmarketsfocusingonfastfrequencyregulation.Remuneratinggeographicflexibilitycouldbeachievedthroughmoregranularlocationalsignalsornewmarketsforlocalisedsystemservices.EnsuringsystemadequacyrequiresadditionalmeasuresPolicymakershavethedutytosetthedesiredreliabilitystandardforelectricitysystemsandensuremechanismsareinplacetomeetit.Iftheydonotproperlyvalueallsystemservices,wholesalemarketsmaynotsufficientlyprovideincentivesfortheassetsneededforsecuresystemoperation.Evenifrestrictionsonprices(e.g.pricecaps)wererelaxedinthewholesalemarket,ifthequantityofreservesthatneedstobeprocuredisnotproperlyvalued,theproblemof“missingmoney”arisesandcanresultinunderinvestment.Threepolicyinstrumentscanhelpsolvethemissingmoneyproblem:energypriceadders,capacity-basedpaymentsandregulatedprocurement.Theseinstrumentscanbeusedincombination–useofonedoesnotexcludeuseoftheothers.Energypriceaddersembedthecostofprocuringreservesintothewholesalemarketbyallowingpricestoexceedvariablecostsduringperiodsofreservesshortages(whichindicatesystemstress).Rewardingcapacitythatdirectlycontributestosecurityintheseperiodscreatesincentiveforinvestmentinthetypesofcapacitythatcanbeavailablewhenactuallyneeded.Capacitypaymentsdirectlyrewardcapacitythroughalong-termpaymentfortheiravailability,providingapredictablestreamofrevenuethatcanencouragesomecapacitytoenterorremaininthemarket.Thesepaymentsalsoeffectivelyreducethevolatilitythatcanoccurwhenenergymarketsdobecomestressed.Itisimportantthatthesepaymentsbedesignedtoensureperformanceoftheassetwhenneeded.Regulatedprocurement,underwhichutilitiesaremandatedtocontractinadvanceenoughenergytosupplyashareoftheirforecasteddemand,canalsoplayasignificantroleinsupportingcapacityadequacybyprovidinglongertermincentives.RetailmarketsneedtoencourageefficientbehaviourwhileprotectingconsumersWell-functioningretailmarketsarecrucialtoensurethatthebenefitsofliberalisedwholesalemarketsarepassedontofinalconsumers.Giventhatmostretailcustomersprefernottointeractdirectlywiththepriceofenergyintheirdailyconsumption,retailersserveacriticalfunctioninthepowersector–i.e.managingandallocatingriskonbehalfoftheirclients.NewdevelopmentsarechangingtheSteeringElectricityMarketsTowardsaRapidDecarbonisationExecutivesummaryPAGE16IEA.Allrightsreserved.typesofrisksthatretailersfaceinpowermarkets.Recentevents,includingthespikeinthepriceofnaturalgas(whichsetstheelectricitypriceinmanymarkets),andextremeweathereventsareleavingconsumersandretailersalikeexposedtotheresultinghighpricesofelectricity.Retailmarketscanservethedesiretoreducesystemcostswhilealsoprotectingconsumers.Innovativetariffs,suchascapacitysubscriptions,canprotectthetrulycriticalportionofacustomer’sconsumptionwhilealsoleveragingtechnologiestomanagedemandduringtimesofstress.Thesemeasurescanbealmostimperceptibletocustomercomfort,suchassmartchargingofelectricvehiclesoractivationofappliances.Butcustomerswhoprefertocompletelyavoidbeingexposedtomarketfluctuationsshouldbeabletochoosefixedtariffsfromfinanciallystablesuppliersforthisservice.SystemplanninglaysthefoundationforpowermarketsTransformingelectricitysystemsiskeytoacleanenergytransition.Tomeetstatedclimategoals,systemswillneedmoregrids,alongwithmoreandbetterintegratedlow-carbonresources(includingdemand-sideparticipation).Developingavisionthatsetsoutclearobjectives,providesarealisticviewofhowsystemsmayevolveandsetsaplanfordeployingtheassetsneededtomeetthepolicyobjectivesishelpfultoframingtheroleofmarkets.Powersectorplanningprovidesinformationonsystemneedsinthelongtermand,assuch,servesasaguideforcompetitiveinvestments.Planningalsosupportspolicymakingasithelpsidentifynecessaryenhancementstomarketdesign.Planningisacomplexprocessthatrequirestakingaccountofalargenumberofuncertainties;thelongerthetimehorizon,thenumberandscopeofuncertaintiestendstoincrease.Traditionalpracticeswerecentralisedandhighlytechnical;newapproacheshaveevolvedtoengage(earlyandoften)awiderangeofstakeholdersinthemissionofdesigningthefuturesystem.Integratedandco-ordinatedplanning(anemergingpracticethatmustnotbeconfusedwithcentralplanning)isacollaborativeframeworkbringingtogetherthestrengthsandinformationfrommanystakeholderswithinthepowersectorandfromothersectorstofeedintotheplan.Ithelpsensurerobustnessinplanningandstabilityintherulesoverthelongterm,therebysupportingdecarbonisationofthepowersystem.Keyfeaturesofeffectiveintegratedplanningaretoconsiderthepowersystemasawhole(includingintegrationwithothersectors);toincentiviseallsolutionsthatcontributetopolicygoals;tobetransparentandengagestakeholders;andtoaimforrobustnesswithrespecttoabroadrangeoffuturesanduncertainties(including,forexample,extremeweatherevents).SteeringElectricityMarketsTowardsaRapidDecarbonisationExecutivesummaryPAGE17IEA.Allrightsreserved.Finally,mechanismsshouldexisttoensureformalisedfeedbackbetweenplanning,policymakingandmarketdesign(withaclearprocessforadaptingrulesovertime)sothatplanningsupportsincreasingambitionsfordecarbonisation.SteeringElectricityMarketsTowardsaRapidDecarbonisationChapter1-OptimisingwholesalemarketsPAGE18IEA.Allrightsreserved.Chapter1.OptimisingwholesalemarketsShort-termwholesalemarketsrevealthesystemvalueofresourcesthroughpricesignalsWholesalemarketsenablethetradingofenergyfromelectricityamongmarketplayers.Akeyfeatureisthattradingoccursatdifferenttimescales,withactivityandpricingchangingasmoreinformationbecomesavailabletosupporttheprecise,real-timebalancebetweendemandandsupply.Wholesalemarketsprovideatransparentwaytoselectthemostefficientresourcestodispatchinordertobalancethesystemsuchthatallstakeholders,includingsocietybroadly,benefitfromtheadvantagesofcompetitioninelectricityproductionandconsumption.Thesaleofenergyinshort-termwholesalemarketsisthemainsourceofincomeforgenerators,providingcloseto80%oftheirrevenues.Forthisreason,theshort-termwholesalemarketisacornerstoneofsuccessfulmarketdesign.Notsurprisingly,thewaythesemarketsaredesignedinfluencessystemoperationandinvestmentdecisionsregardingassets.Inaliberalisedelectricitymarket,pricesignalsthatarisethroughmarketdesignandactualtradingwillprovidetheinformationmarketactorsneedtomakedecisions(operationalorinvestment)thatalignwiththeneedsofthesystem.Theaimofmarketdesignistoensurethatpricesignalsrepresenttherealityofsystemneedsandappropriatelyrewardservicesthatprovidevaluetoit.Forexample,inperiodsofhighdemand,pricesignalsshouldincentiviseincreasedgenerationorreducedconsumption.Pricesignalsshouldalsoincentivisesourcesofflexibilitytomodifythelevelofproductionorconsumptioninresponsetothesystemneeds.Assuch,pricesignalsshouldbereflectiveoftheactualcostsofdifferentactionsandtechnologies.Inthecontextofacleanenergytransition,anemergingchallengeistodesignmarketstoenableefficientuseoflow-carbonsourcesandtechnologieswhilealsominimisingsystemcosts.SteeringElectricityMarketsTowardsaRapidDecarbonisationChapter1-OptimisingwholesalemarketsPAGE19IEA.Allrightsreserved.SourcesofrevenueforgeneratorsinselectedcompetitivemarketsinUSDperMWh,2016IEA.Allrightsreserved.OneexampleofhoweffectivemarketdesigncanreduceemissionswhiledeliveringsubstantialcostsavingscanbefoundintheChinaPowerSystemTransformation,accordingtoananalysispublishedbytheIEAin2019.ModellingoftheshiftfromthecurrentdispatchmodeinChinatoafullyeconomicdispatchthroughatwo-settlementsystemshowsthatuseofshort-termwholesalemarketscouldreduceannualoperationalcostby11%,equatingtoroughlyUSD45billionperyearin2035.Theshort-termmarketsalsosharplyreducecurtailmentofvariablerenewables(VRE),therebyhelpingtolowercarbondioxide(CO2)emissionsby15%.Astechnologyevolvesandtheneedsofsystemschange,itisnecessarytoadjustmarketdesigntoensurethatpricesignalsprovidedbythewholesalemarketscontinuetosupportefficientoperationsandnecessaryinvestments.Somelow-carbontechnologies,suchasnuclear,arebettersuitedtowholesalemarketsdesignedprimarilyfortradingoffossilfuelgeneration.Othertechnologiesandactionsthatareplayinglargerroles–suchasVRE,newstoragetechnologiesordemandresponse–havecharacteristicsthatoffervaluetosystemsthatarenotfullycapturedundercurrentmarketdesign.10%20%30%40%50%60%70%80%90%100%020406080100120140160PJMMISONYISOERCOT(2019)AlbertaKoreaChileSpainAll-InPrice(USD/MWh)EnergyUpliftAncillaryCapacityEnergypriceshareSteeringElectricityMarketsTowardsaRapidDecarbonisationChapter1-OptimisingwholesalemarketsPAGE20IEA.Allrightsreserved.AscountriesdecarbonisetheirpowersystemsbyincreasingtheshareofVREandintegratingotheremergingtechnologiesandactions,itwillbenecessarytoadjustthedesignofwholesalemarkets.Anoverarchingchallengeisfindingwaystoharnessthefullpotentialoftechnologiescharacterisedbyuncertaintyandvariabilityintheirgeneration,inbothlocationandintime.MarketdesignmustbalanceplanningandadaptabilityAsdifferenttechnologieshavedifferentcharacteristicsintermsofkeyfunctions(e.g.start-uptimes,minimumloadsandrampingrates),ensuringtheseconstraintsarerespectedduringoperationrequiresplanninginadvancetheexpectedscheduleoftheassets.TheuncertainnatureofVREgenerationandofexpecteddemand,however,makesitimpossibletopre-plansystemoperationwithcompletecertainty.Asthehourofdeliveryapproachesandtheaccuracyofforecastsimproves,systemoperatorsusuallyneedtomodifypreviouslymadeschedules.Tosupportthisneedforbothadvanceplanningandreal-timematchingofdemandandsupply,electricitywholesalemarketstypicallycombineaseriesofmarketsthatoperateconsecutivelyacrosstime.Generally,thesemarketsuseeithertwo-settlementsystems,withtradesoccurringinthe“day-ahead”marketandinrealtime(the“balancingmarket”),orthree-settlementsystems,inwhichcasean“intraday”marketisinjectedbetweenthetwoothers.Thesemarketsoperatetogether,allowingoperatorstoplanainadvancewhatresourcestheywillcallontobalancethesystemwhileprovidingflexibilitytoadaptoperationsinrealtimeifgenerationordemandarehigherorlowerthananticipated.Originally,marketsweredesignedwhenlarge,dispatchablethermalpowerplantsprovidedthemajorityofgenerationandsystemoperatorsknewwhichphysicalassetswouldbeavailableatagiventimeandlocation,theirlevelofcapacityandanytechnicalconstraintslinkedtogeneratingormodifyingoperations.Normally,theonlydeviationsfromtheday-aheadscheduleinsuchasystemwouldbesmalladjustmentsduetoerrorsindemandforecastortocompensateforunplannedoutages.AstheshareofVREincreases,newchallengesariselinkedtotheirintrinsicuncertainty.Thevolumeofelectricitygeneratedbysolarorwind,forexample,canchangefromoneminutetothenext;assuch,uncertaintyonexpectedgenerationincreasesoverforecastswithlongertimeframes.Additionally,newtechnologies,suchasDER,canintroducecharacteristicsforwhichcurrentmarketdesignsarenotyetwelladapted.Yet,ifthemarketdesignisfitforcapturingtheirvalue,thesetechnologiescansignificantlyreducesystememissionstosupportacleanenergytransition.SteeringElectricityMarketsTowardsaRapidDecarbonisationChapter1-OptimisingwholesalemarketsPAGE21IEA.Allrightsreserved.Followingmoredetaileddescriptionsofthemainelementsofmarketdesignandsomekeyfeaturesthatinfluencesystemoperation,thischapteroffersbroadrecommendationsforconsideration.Thechapterdoesnotpreciselycoverallelementsorpossibledesignsbutaimstodemonstrateasetofguidingprinciples.Day-aheadmarket:enablesplanningtheoperationofassetsTheday-aheadmarketservesthefunctionofprovidingbothmarketactorsandthesystemoperatorwithaninitialexpectationofhowsystemoperationswillplayoutonthefollowingday.Producersparticipatingdirectlyinthemarketwillgiveoffersforgenerationtheycanprovide(sell);consumers(includingretailers)will,inturn,providebidsforelectricitytheywanttoconsume(buy).Basedontheoffersandbidsreceived,themarketoperatorwillmatchsupplyanddemandinawaythatminimisescostsofoperatingthesystem,therebyensuringthelowestcosttothesystem.Agivenmarketwilldivideadayintomultipleperiods(typically24,48orevenmore)andthisprocesswillberepeatedforeach,withoffersandbidsbeingreceiveduntiltheday-aheadgateclosuretime,typicallyaroundnoonofthedaybeforedelivery.Day-aheadmarketsareusuallybasedontheprincipleofmarginalpricing(alsocalledpay-as-cleared).Thismeansthatoncethemarkethasdeterminedwhichbidsandoffersareaccepted,thepriceofelectricityforagivenperiodissetbythemostexpensiveofferthatcomesintoplay.Thispriceiscalledtheclearingpriceanddetermineswhois“in”or“out”ofthemarket,referredtoasclearingthemarket.Allproducerswithoffersbelowtheclearingpricewillbescheduledtogenerate;allconsumersthatbidtobuyatorabovetheclearingpricewillbescheduledtoconsume(intheabsenceofphysicaltransmissionconstraints,whichwillbefurtherdiscussedlater).Anessentialaspectisthatallproducers“cleared”inthemarketwillreceivethesameclearingprice,eveniftheyofferedlowerprices.Inturn,allconsumersclearedwillpaythisprice,eveniftheywerewillingtopaymore.Broadconsensusexiststhatthismechanismforsettingthepriceofelectricityprovidesthemostefficientwayofmatchingproductionandconsumption,basedonallavailableresourcesandinformationatagiventime.Inadditiontoreflectingtheactualcostofclearingthemarket,marginalpricingprovidesotherimportantcues.Byrevealingmomentswhenclearingthemarketdependsonhigh-costactionsand/ortechnologies,itactsasathermometerfortheneedsofthesystem.Italsocreatesstrongincentivesforgeneratorstolookforwaystolowertheircosts,asbeingabletobidbelowcompetitorsallowsthemtocapturehigherbenefits.Ineffortstodecarbonise,ithasanotherrole:aswindandsolarhavenofuelcosts–andthuslowmarginalcosts,theyareconsistentlyabletoofferbelowthermalSteeringElectricityMarketsTowardsaRapidDecarbonisationChapter1-OptimisingwholesalemarketsPAGE22IEA.Allrightsreserved.generators(whoneedtopayforfuel).Thismeanstheyclearthemarketfirstandcaptureprofitseveniftheirmarginalcostisclosetozero,whichsupportstheminrecoveringtheirfixedcosts.Ultimately,marketclearingenablesthecreationofdetailedschedulesforindividualgeneratorsandconsumerswhilealsogivingmarketplayersaclearexpectationofoperationforthefollowingday.Theday-aheadmarketisthemainmarketthatdefinessystemoperationandreflectsthecostsofoperatingitthroughpricesignals.Assuch,itisoftenconsideredthemainmarkettowhichothermarketsrefer.Long-termcontracts,forexample,aretypicallysettledagainsttheday-aheadmarketprice.Intradaymarket:atooltorefineschedulesAsitbecameclearthatrisingsharesofVREintroducehighlevelsofuncertaintyongenerationschedules,marketsinplacessuchasEuropeintroducedintradaymarkets.Theintradaymarketfacilitatesadjustmentoftheday-aheadschedulebyallowingmarketparticipantstotradeanyexpectedimbalancesindemandandsupplyaftertheday-aheadmarkethasclosed,butbeforethehourofdelivery.Thisprovidesameanstoupdateschedulesclosertothehourofdelivery,asforecastsforgenerationfromVREbecomemoreaccurate.Tradingontheintradaymarketbeginsaftertheclosureoftheday-aheadmarketandwillcontinueuntiltheintradaygateclosuretime.Differentintradaymarketshavedifferentgateclosuretimes,rangingfrom60minutesbeforedeliverytimeontheNordicmarketdowntojustfiveminutesinplacessuchasBelgiumandtheNetherlands.Asshortertimehorizonsgivemarketplayersmoretimetoupdatetheirpositionsbasedontheevolvingrealityofthesystem,mostcountriesinEuropearemovinginthisdirection.InEurope,theintradaymarketfollowsthemodelofsingleintradaycoupling(SIDC),basedoncross-bordercontinuoustradingwithbidsandoffersmatchedonapay-as-bidbasis.Incontrasttothemarketclearingandsinglepriceoftheday-aheadmarket,pay-as-bidmeansthatbidsandoffersarematchedinpairs,andeachtransactionoccursatadifferentprice.Itshouldbenotedthatiftradedvolumesaresufficient,itispossibletocombinethistypeofcontinuoustradingwithauctionsthatprovideaclearingpriceduringtheintradaymarket.Balancingmarket:AtoolforefficientdeliveryinrealtimeThebalancingmarketiswhereactualphysicalmatchofgeneration(supply)andconsumption(demand)iscarriedoutinrealtime,managedbythesystemoperator,whotakesoverasasinglebuyer,acquiringandactivatingreservesasSteeringElectricityMarketsTowardsaRapidDecarbonisationChapter1-OptimisingwholesalemarketsPAGE23IEA.Allrightsreserved.needed.Typically,thesystemoperatorwillbuyreservesinadvanceandactivatetheminrealtimeasneededtomaintainthebalancebetweensupplyanddemand.Ahypotheticalmappingofscheduledgenerationbasedontheday-aheadmarketandactualhourlygenerationatthemomentofdeliverydemonstratesthepotentialformismatch.Insomemoments,afictionalgeneratorproducedmorethanitwasscheduledto;inothermoments,itproducedless,creatingimbalancesbetweentheplannedgenerationandtheactualgeneration.Anydeviationfromtheschedulescreatedintheday-aheadandintradaymarketsissettledinthebalancingmarket.Schematicofmismatchbetweenhypotheticalday-aheadscheduleandactualgenerationIEA.Allrightsreserved.Asthereisalwayssomeriskthataproducerorconsumermaydeviatefromtheplannedscheduleduringthehourofdelivery,thesystemoperatorneedstohaveawaytoensuresystemstability.Havingpre-establishedcontractsfordifferentkindsofreserves,theoperatorcanactivatethenecessaryresourcesinrealtimetokeepthesysteminbalanceinacost-effectivemanner.Theactualcostofdrawingontheseresourceswillbesettledafterwardsbetweenthepartyresponsiblefortheimbalanceandtherelevantreserveprovider,typicallythroughacentralclearingparty.Thepotentialofhavingtopaywhenresponsibleforimbalancescreatesincentivesforbeingabletofollowtheplannedschedule–andhasbeenasignificantdriverforimprovingforecastingforVREgeneration.Inturn,thepotentialtobecontracted01020304050607080024681012141618202224MWDay-aheadscheduleActualgenerationSteeringElectricityMarketsTowardsaRapidDecarbonisationChapter1-OptimisingwholesalemarketsPAGE24IEA.Allrightsreserved.foreithersupplyordemandwithinthebalancingmarketprovidesanewrevenuestreamfortechnologiesthatcanmodifygenerationorconsumptioninthedirectionneededbythesystem.Designingmarketstocapturevaluefromlow-carbontechnologiesRefiningtimeresolutionunlocksflexibilityofdiversetechnologiesAsalludedtoabove,thetimeresolutionofthemarketisanessentialaspectofbeingabletousemarketpricesasincentivesforflexibility.Infact,resolutionreferstotwofeatures:thegranularityofthedispatchperiodforelectricitytradedonthemarkets(themarkettimeunit);andtheminimumperiodoftimeduringwhichthesystemoperatorwillconsiderimbalancesbetweenscheduledandactualgenerationandconsumption(theimbalancesettlementperiod).Refiningthetimeresolutionofthemarketwouldmeanreducingthespanofbothoftheseelements.Withhigherresolutionofthemarket,itispossibletoprovidemarketplayerswithmoredetailedpricesignalsthatbetterreflectthestatusandneedsofthesystemataparticularpointintimeand,inturn,toimprovetheschedulingofsystemassets.HighermarketresolutionisparticularlyimportantforsystemswithhighsharesofVRE,astheirintrinsicvariabilityisrelevantoverbothshort(lessthanonehour)andlongtimeframes.Asshownbelow,thegenerationprofilesofwindandsolarchangesignificantlywhenconsideringaresolutionoffiveminutesversusonehour.Ifforcedtorelyona1-hourresolution,itwouldbenecessarytonetoutasignificantimbalancebetweenexpectedandactualgeneration.Ashigherresolutioncanreducethevolumeofenergyimbalancesthatneedtobenettedout,itcanalsoprovideincentivesforflexibilityandhighqualityforecastingofVRE.Finally,higherresolutionscanenabledeploymentofnewprovidersofflexibility(e.g.batterystoragetechnology)andbettercapturetheflexibilityofexistingloads.Altogether,thisincreasestheefficiencyofuseofexistingflexibilityassetsandprovidesincentivestoremuneratemarketactorsthatcanprovidetheshort-termflexibilitythesystemneeds.In2017,theEuropeanCommissionintroducedtheElectricityBalancingGuideline,whichcallsforharmonisingtheimbalancesettlementperiodat15minutesacrosstheEuropeanUnion.Asubsequentcost-benefitanalysiscommissionedbythetransmissionsystemoperators(TSOs)intheNordicregion(Energinet,Fingrid,StatnettandSvenskakraftnät)foundthatreducingtheimbalancesettlementperiodto15minuteswouldprovidebetterinvestmentsignalsforflexibilityandSteeringElectricityMarketsTowardsaRapidDecarbonisationChapter1-OptimisingwholesalemarketsPAGE25IEA.Allrightsreserved.improvedfrequencyquality,therebytriggeringimproveduseofinterconnectorcapacity.In2021,theAustralianEnergyMarketCommission(AEMC)shortenedthesettlementperiodfrom30minutestofiveminutes.Averagegenerationofwindandsolarenergyat5-minuteand1-hourresolutionsinMWinDK1,13July2021?IEA.Allrightsreserved.Source:IEAanalysisbasedonenergidataservice.dk,(2022).Locationalpricesignalsprovidegeography-awarevalueTherepresentationoftheunderlyinggeographyofanelectricitysystemalsoplaysastrongroleinmatchingthephysicsandthemarket.Atpresent,twomainapproachesexist:azonalrepresentationsplitsthemarketintodifferentsimplifiedpricezones(asdoneinEurope);andanodalrepresentationreflectsthephysicallayoutoftheunderlyingtransmissioninfrastructure(used,forexample,insomesystemsintheUnitedStates).Inazonaldesign,differentzonescanhavedifferentprices.Withinthezones,themarketassumesthattherearenocongestionsandpowercanmovefreely,irrespectiveofanyphysicalcongestionsthatmayarisewithinthezoneinreallife.Betweenzones,powerflowislimitedbyavailabletransmissioncapacity,whichisrepresentedinthemarketmodel.Iftransmissioncapacityinsideazonedoesnotlimittheflowofelectricityasscheduledbythemarket,priceswillbeconsistentacrossneighbouringzones.Ifthetransmissioncapacityisinsufficient,priceswilldivergetoreflectthecongestion.Ahighpricewithinagivenzoneindicateseitheralackofgenerationorexcessivedemandandthusprovidesincentivesformarketplayerstoparticipatebyincreasinggenerationorloweringconsumption.Alowprice,incontrast,indicatesexcessgenerationandprovidesincentivesforincreasedconsumptionand/ordiminishedgeneration.Inthisway,pricesignalsprovideincentivestoalignwiththeneedsofthesystem.0100200300400500600700800900100011001200130000:0002:0004:0006:0008:0010:0012:0014:0016:0018:0020:0022:0000:00MWSolar(5minutes)Wind(5minutes)Wind(1hour)Solar(1hour)SteeringElectricityMarketsTowardsaRapidDecarbonisationChapter1-OptimisingwholesalemarketsPAGE26IEA.Allrightsreserved.AnexampleofcongestioncancausepricestodivergeacrosspricezonescanbeseenintheNordiccountries,eachofwhichhasmultiplepricezones:Denmark(2),Norway(5)andSweden(4).Thepricevariationsindicatethereisnotenoughtransmissioncapacitytotransportelectricityfromlow-pricedzonestowardsthosewithhigherprices.Ifitwerepossibletotransmitavailablesupply,priceswouldaverageoutacrosstheentireregion.Day-aheadpricesintheNordicregioninEUR/MWhon2May2022IEA.Allrightsreserved.Note:Thismapincludediswithoutprejudicetothestatusoforsovereigntyoveranyterritory,tothedelimitationofinternationalfrontiersandboundariesandtothenameofanyterritory,cityorarea.Source:IEAanalysisbasedonNordPoolGroup,(2022).SteeringElectricityMarketsTowardsaRapidDecarbonisationChapter1-OptimisingwholesalemarketsPAGE27IEA.Allrightsreserved.Nodalpricing,whichaccountsforindividualnetworkbusbarsinthemarketmodel,offersgreatergranularitythanzonalpricing.Sincealltransmissionlinesareconsidered,therearenoassumptionsofinfinitecapacityinanarea.Underthismarketstructure,whentransmissioncapacitybetweennodesisnotfullyutilised,priceswillconvergewhilecongestionwillresultindifferentpricesindifferentnodes.Thisallowsforbetterrepresentationofcongestioninthesystemandofthelocationalvalueofenergy.Theincreasedgranularityofnodalzonesalsoproducesasignificantlyhighernumberofpricepointsinthesystem.InDecember2010,theElectricReliabilityCouncilofTexas(ERCOT),theindependentsystemoperator(ISO)inTexas,switchedfromazonaltoanodalmarket,whichsignificantlyincreasedthenumberofpotentialindividualpricesinthestate.Mappingthetwosystemsprovidesagoodillustrationofthedifferencebetweenhowzonalandnodalpricingoptionsrepresenttheunderlyinggridinthedispatch.ERCOTmarketdesigntransitionfromzonal(left)tonodal(right)pricesIEA.Allrightsreserved.Source:IEAanalysisbasedonERCOTdata(2021)https://www.ercot.com/news/mediakit/mapsBothtypesofmarketdesignhavemeritsanddrawbacks,whichcontinuetotriggerdebateaboutwhichisbest.Whatmattersmostisthatchosenmarketmodelaccuratelyreflectsallphysicalgridcongestions.Ifthechosenmarketmodeldoesnotreflectphysics,thesystemoperatorwillhavetotakeactionstomodifythemarketresultafterithascleared.Thiscaninvolvehavingtorequestspecificassetstoreschedule,withsomebeingaskedtoproduceless(ornotatall)andothersaskedtoproduceeventhoughtheywerenotselectedtoruninthemarketclearing.Suchreschedulingensuressystemstabilitywhentakingintoaccountcongestionsthatwerenotreflectedinthemarketdesign,butresultsinalossofSteeringElectricityMarketsTowardsaRapidDecarbonisationChapter1-OptimisingwholesalemarketsPAGE28IEA.Allrightsreserved.efficiencyinmarketoperation,withthefinaleffectofincreasingpricesinlocationswithabundanceofenergyanddepressingtheminthosefacingscarcity,reducingtheincentivesforloadandgeneratorstochoosethebestlocationsfromasystemperspectiveAnexampleoftheneedforreschedulingduetocongestionaftermarketclearingcanbefoundinGermany,whichisrepresentedasonepricingzoneintheEuropeanmarket.Intheory,ifthataccuratelyrepresentstheGermangrid,itindicatesthatGermanyhasnosignificantinternalphysicalcongestions.Inreality,however,frequentinternalgridcongestionsexistinGermany,drivenbythreeinterrelatedfactors:insufficienttransmissioncapacitytotransportthehighvolumesofrenewablegenerationfromthenorthtowardsconsumptioncentresinthesouth;theclosureofnuclearplantsinthesouth;andthepolicydecisiontoestablishasinglepricezone.ThismeansthatthemarketrepresentationdoesnotreflecttheunderlyingrealityoftheGermangrid.Asaresult,Germansystemoperatorshaveincurredveryhighcoststoensuregridstability.In2020alone,redispatchingcarriedacostofEUR981.7millioninGermany,withredispatchmeasurescostingEUR221millionwhileroughlyEUR761millionwenttocompensatingwindturbinesthatwerecurtailedafterhavingbeenclearedbythemarket.Ifthemarketmodelmoreaccuratelyrepresentedtheunderlyingphysicalsystem,suchconstraintswouldbecalculatedwhenassetswereclearedinthemarket.Theoriginalmarketclearingwoulddefine,forexample,theparticipationofwindassetstakingintoaccounttheavailabletransmissioncapacity.Thiswouldeliminatetheneedtomodifymarketclearingafterwardsand,inturn,provideadequatepricesignalsandreducethecostofcompensation.Sincedispatchingwouldbebasedonpricesignalsandconsidertransmissionconstraintsfromthebeginning,itwouldalsoeliminatecostsassociatedwithcompensatinggeneratorsthathavetoberedispatchedoutofthemarket.Additionally,ifmarketsarecoupledacrosssystemoperators(asinEurope),dispatchcanaccountforalloftheassetsacrosstheinterconnectedsystem,whereasredispatchingisusuallymanagedbyasinglesystemoperatorandonlywithassetsunderitsauthority,whichreducestheefficiencyoftheresultingredispatch.Inshort,adesignthatbetterrepresentsthesystemgeographycouldavoidasignificantshareofredispatchingcosts.Toresolvethisdisconnect,policy-drivenplansaimtoexpandtransmissioncapacitybetweenthenorthernandsouthernpartsofGermany,therebysupportingfuturebetteralignmentbetweenthechosenmarketdesignandthephysicalgrid.Anotherconsequenceofthemismatchbetweenthemarketrepresentationandsystemphysicsisincreasedcreationofunscheduledflows.TheseareunplannedSteeringElectricityMarketsTowardsaRapidDecarbonisationChapter1-OptimisingwholesalemarketsPAGE29IEA.Allrightsreserved.flowsofelectricityacrosspartsofthesystemduetothephysicalexecutionofthemarketclearing,whichwerenotexpectedduetothepricemodelchosenforthemarket.Unscheduledpowerflowsconsumeinterconnectioncapacitybetweenbiddingzones,makingitmoredifficulttooperatethesystemaccordingtothemarketclearing.Theyalsomakeitharderforsystemoperatorstoensuresecurityandreduceoverallsystemefficiency.Inthecase,forexample,ofatradebetweenageneratorinthenorthofGermanyandaloadinthesouth,internalcongestionintheGermanpricezonemayforcethepowertoflowthroughotherpricezones(e.g.Poland,AustriaortheNetherlands),eventhoughthezonaldesignassumesnocongestionsinsidetheGermanzone.Ifthemarketmodelbetterrepresentedthesecongestions,thedispatchcouldchooseandprovidevisibilitytothemostefficientpathforpowerflowandprovidepricesignalsthataccuratelyrepresentthestatusofthesystem.Althoughmeasuresarebeingimplementedtoreducethem,unscheduledpowerflowsremainanissueinEurope.AstheystemfromincorrectrepresentationofthephysicalconstraintsofthemeshedA/Cgrid,improvingrepresentationofpowersystemtopologyinthemarketmodelisonedirectwaytoreducesuchflows.UnscheduledpowerflowswithincentralEuropeinTWh,2016-2020IEA.Allrightsreserved.Source:IEAanalysisbasedonACER(2020),ElectricityMarketMonitoringReport.SteeringElectricityMarketsTowardsaRapidDecarbonisationChapter1-OptimisingwholesalemarketsPAGE30IEA.Allrightsreserved.Settlingcontractskeytobalancinglong-termsignalswithreal-timedispatchingManyconsumersandproducersseektohedgethepriceriskoftheelectricitymarket,aimingtoreduceuncertaintyonthefuturepriceofelectricitytheywillbuyorsell,andthereforealsoreducinginvestmentrisk.Long-termtradingandcontractsfortheexchangeofelectricity–suchasfutures,forwardsorpowerpurchaseagreements(PPAs)–areinstrumentsthatallowmarketparticipantstomanagetheirriskexposureincompetitiveelectricitymarkets.Bymakingexplicitthecostofmanagingrisk,theselong-termcontractssupportinvestmentsthroughimprovedriskmanagement,increasecompetitionbyloweringbarrierstoentryandprovidetransparentpricediscovery.AstudycarriedoutbySapereResearchGroupshowsthatdevelopinganelectricityfuturesmarketinAustraliatriggereddownwardpricepressure,reducingtheretailelectricitypricebyAUD8to10/MWh(approximatelyUSD6to7/MWh).Differenthorizonsforlong-termcontractsexistandfulfildifferentobjectives.Shorterlong-termcontracts,withhorizonsbetweenonetofiveyears,aretypicallyusedtohedgepriceriskfromanoperationalperspective.Whilethosewithahorizonofmorethanfiveyears,typicallyaimtoreduceincomeuncertaintyasameansofstimulatinginvestments.Sincelong-termcontractsarelinkedtoriskmanagement(andshouldnotdefineactualsystemoperation),theytendtohavelowgranularity.Ratherthanrepresentingspecifichoursasintheshort-termmarkets,long-termcontractsareoftenlinkedtopeak-andbase-loadperiodsacrosstheday.Inmarketsthataretransitioningfromregulatedtoliberalisedsystems(e.g.IndiaandMexico),thedifferentwholesalemarketswilloftenneedtoco-existwithlong-termpoint-to-pointphysicalcontracts.Inthesecontracts,thevolumeofelectricitypurchasedneedstobedeliveredspecificallybythecontractedgenerator,evenifatthetimeofdelivery,itwouldbemoreefficienttouseotherassets,possiblybelongingtoothergeneratingcompanies.Thisreflectsamarketcontextinwhichindividualgeneratingcompaniesoptimisetheirownportfoliobutthereisnoincentivetooptimisetheoverallsystem.Havinglong-termcontractssettledfinanciallymeansthatwhilethepriceishedged,theactualtradingofelectricityisbasedontheshort-termwholesalemarkets.Thisensuresleast-costdispatchandmaximisestheeconomicsurplus,supportingoptimisationoftotalsystemcostswhilestillprovidinghedgingpossibilitiesthroughlong-termtrading.Whilethepossibilitytohedgepriceriskinthelongtermisuseful,toensureadequatepricesignalsarecreatedtomaintaincost-efficientdispatch,designmustensurethatlong-termmarketsdonotimpedeadequatevolumeoftradinginshort-termmarkets.Ahighenoughvolumeinshort-termmarketsisessentialtoensureSteeringElectricityMarketsTowardsaRapidDecarbonisationChapter1-OptimisingwholesalemarketsPAGE31IEA.Allrightsreserved.theclearingpricereflectstheequilibriumcostofthesystemitselfwhilealsolimitingthepossibilitiestoexercisemarketpower.Ifthemarketsareeffectivelyintegrated,financiallong-termcontractsdonotimpedeparticipationinshort-termmarkets.Additionally,arbitragepossibilitiescreateincentivesforparticipatinginthemarketswithtimelinesclosertothehourofdelivery,motivatedbythelowgranularityoftypicalfinanciallong-termcontracts.Physicallong-termcontractscreateriskofefficiencylossesAhypotheticalcasedemonstrateshowlong-termcontractscanundermineefficiency.CompanyAhasthreegenerators(A1,A2andA3)of100MWeach.CompanyBhastwogenerators(B1andB2)of50MW.Themarginalcostsforthesegeneratorsarepresentedbelow.CharacteristicsofhypotheticalgeneratorsGeneratorPriceperMWhCapacityOwnerGeneratorA1USD20100MWCompanyAGeneratorA2USD25100MWCompanyAGeneratorA3USD30100MWCompanyAGeneratorB1USD2750MWCompanyBGeneratorB2USD3550MWCompanyBInthehypotheticalcase,long-termcontractsobligeCompanyAtodispatch250MWandCompanyBtodispatch70MW.Ifthecontractsarephysicalinnature,todeliverthecontracted250MW,CompanyAwouldscheduleallofgeneratorA1andA2plus50MWfromA3.Inturn,CompanyBwouldscheduleallofB1and20MWofB2.Whilesuchaschedulefulfilsthecontractualrequirementsofeachcompanyandminimisestheirowncosts,itisnotthemostefficientoutcomefromasystemperspective.Schedulingthataimstooptimisetheentiresystemwould,atmarketclearing,dispatchA3–whichhaslowercosts–insteadofB2.SteeringElectricityMarketsTowardsaRapidDecarbonisationChapter1-OptimisingwholesalemarketsPAGE32IEA.Allrightsreserved.Incontrast,ifthelong-termcontractsweresettledfinancially,bothcompanieswouldbepaidforelectricitysoldinthelongterm,whileelectricityisdispatchedintheshort-termmarketunderleast-costconditions.Itisimportanttonotethatfuelcontractscanaffectthepossibilitiesgeneratorshavetooptimisegenerationbyprocuringcheaperenergyfromtheshort-termmarket.Ifthecontractforsupplyoffuelisinflexible(e.g.becauseof“take-or-pay”obligations),themarginalcostoffuelforthecontractedgeneratoriszero,leavingnoincentivetoprocurecheaperelectricity.Assessingupstreamanddownstreamcontractconditionsisvitaltoenableflexiblecost-effectivedispatching.FinalrecommendationsAsthecornerstoneofelectricitymarkets,thereareseveraldesignaspectsthatarerecommendedtoimplementasawaytofacilitateandacceleratethecost-efficientintegrationoflow-carbonsources:Refinetimeresolutionandimprovegateclosuretimes:enablecreationofpricesignalsthatbetterrepresentthevalueofelectricityandflexibilityacrosstimeandimprovetheadaptabilityofschedulestorespondtouncertainsupplyanddemand.Ensurepricesignalsrepresentlocationalvalue:ensuringthemarketmodelmatchestheunderlyingphysicalrealityofthesystemallowspricesignalstodifferentiatethegeographicalneedsofthesystemandrewardactorsthatprovidevaluetothesysteminthisdimension.Ensurelong-termcontractsdonotimpedeoptimaldispatch:separatingpricehedgingandlong-termsignalsfromthephysicaldispatchofassetsenablesoptimalshort-termdispatchingwithoutcompromisinglong-termcontracts.SteeringElectricityMarketsTowardsaRapidDecarbonisationChapter2–MarketsinstrumentstoacceleratedecarbonisationPAGE33IEA.Allrightsreserved.Chapter2.MarketinstrumentstoacceleratedecarbonisationLeveragingwholesalemarketsandsupportpoliciesiskeytoacceleratedecarbonisationInmanyelectricitysystemsaroundtheworld,low-carbontechnologies(suchaswind,solarPV,nuclear,biomassandgeothermal)havebecomethemostcost-competitivegenerationsourcesrelativetothermalgeneration.Often,thisreflectsdecadesofpoliciesdesignedtospurtechnologicaladvances.Todate,however,arangeofmarketdesignsandregulatoryframeworkshavefallenshortofstimulatingsufficientinvestmentinlow-carbontechnologiesduemainlytotwooverarchingfactors:lackofacknowledgementofthevalueoflow-carbontechnologiesandlong-termuncertaintyabouttheirrevenues.Incompetitivepowersystems,thewholesalemarketisthemaininstrumenttoachievethreeinterrelatedgoals:ensureefficientsystemoperation;minimisethecostofgeneration;andstimulateinvestmentinthetechnologiesneededforthefirsttwo(seedetaileddiscussioninChapter2).Pricesignalsplaythecentralroletoachievethesegoals;assuch,itiscrucialthattheyarecompleteandprovidealevelplayingfieldforallgenerationtechnologiesbasedontheirattributesandthevaluethattheybringtothepowersystem,forexamplebygeneratingelectricityfromlow-carbonsourcesorcontributingtothesecurityofthesystem.Toenableefficientcompetitionbetweenallgeneratorsthatprovidesenoughrevenuesforlow-carbontechnologies,itisimportanttoaccountforthefullcosttosocietyoffossil-firedtechnologies–i.e.theirnegativeexternalities.Akeymechanismtoachievethisistoreflectthecostofcarbondioxide(CO2)emissionsinwholesalemarketdesign,suchthattheuseoffossilfuel-basedtechnologiesreflectstherealnegativeimpacttosociety,shiftingtheoperationalpatterntoenablemorelow-carbongenerationandthatthesetechnologiesareappropriatelyvalued.Infact,failingtoaccountfornegativeexternalitiesprematurelyerodesthevaluecreatedbylow-carbontechnologies.However,evenafterensuringalevelplayingfield,marketrevenuesmaystillfallshortofencouragingsufficientinvestmentinlow-carbongeneration.Thismayreflectvariousreasonssuchaslong-termuncertaintyoverrevenuesorloworinsufficientcarbonpricing.Supportpolicies,andincreasingly,market-basedSteeringElectricityMarketsTowardsaRapidDecarbonisationChapter2–MarketsinstrumentstoacceleratedecarbonisationPAGE34IEA.Allrightsreserved.instrumentscancontributebyprovidingadditionalrevenuecertainty,toclosethegapbetweentheinvestmentlevelsencouragedbythewholesalemarketandthedesiredpolicyobjective.Thischapterexploresoptionstodesignmarket-basedsupportinstrumentsforcleanenergyinvestmentthatensuresystemintegrationandreducetheshareofsupportpolicycoststhatareultimatelysocialisedtoendconsumers.Carbonpricingiskeytovaluinglow-carbontechnologiesInseveralpowermarkets,introducingcarbonpricinghaspartiallylevelledcompetitionbymakingitmorecost-efficienttodispatchlow-carbontechnologies(VREs,hydropowerornuclear)orplantsfiredwithnaturalgasaheadofthosethatrelyoncoal.Thecarbontaxhaseffectivelyshiftedthemeritorderofsupply.IntheUnitedKingdom,strategicapplicationofseveralpolicyinstrumentstriggeredasharpdeclineintheshareofcoal-firedgeneration–from37%in2003to5%in2018–whilespurringarapidincreaseintheshareofVREgeneration–from9%to21%.StimulatingsuchashiftwasakeyaimoftheUKgovernmentwhenitimplementedaUK-specifictax,whichwasaddedontothepriceofcarbonintheEUEmissionsTradingSystem(EUETS).Firstintroducedin2013,thistaxwasoneofasetofpoliciesthathelpedincentiviseastrongershiftfromcoaltogasthanwaslikelywiththeEUETSalone.Mostnotably,introducingasetofdedicatedinstruments,suchascontractsfordifferences(CfDs)andauctions,contributedtotheshareofcoal-firedgenerationdecliningfrom37%in2013to5%in2018,whiletheshareofVREgenerationgrewfrom9%to21%overthesameperiod.SteeringElectricityMarketsTowardsaRapidDecarbonisationChapter2–MarketsinstrumentstoacceleratedecarbonisationPAGE35IEA.Allrightsreserved.DeclineinshareofcoalgenerationintheUnitedKingdomafterintroductionofcarbonpricingIEAallrightsreservedSource:IEA(2020),WorldEnergyBalances.ArecentIEAstudyassessedthepotentialtoreduceemissionsinThailandbyintroducingofcarbonpricing.Usingthecountry’smainplanningdocument,thePowerDevelopmentPlan(PDP),asabasescenario,analysisshowedthatacarbonpriceofUSD30/tCO2couldincentiviseafiveTWhgenerationshiftfromcoaltonaturalgasandreduceemissionsbytwoMtCO2by2030.PushingthecarbonpricetoUSD40/tCO2couldincentivisemorethan23TWhofcoaltogasshiftinganddeliver13MtCO2ofemissionsreduction.Thelattercaserepresentsan11%reductionfromthePDPscenario.0%5%10%15%20%25%30%35%40%45%201320142015201620172018Generationshare(%)CoalGasSolarPVWindSteeringElectricityMarketsTowardsaRapidDecarbonisationChapter2–MarketsinstrumentstoacceleratedecarbonisationPAGE36IEA.Allrightsreserved.ImpactsofdifferentcarbonpricelevelsongenerationmixandemissionsinThailand’spowersectorinthePDPscenario,2030IEA.Allrightsreserved.Source:IEA(2021)ThePotentialRoleofCarbonPricinginThailand’sPowerSector.Inmanycases,governmentsintroduceastaggeredtaxtogivemarketplayerstimetoadjust.Initially,itmaynotaccountforthecostofallnegativeexternalities,soadditionalpolicysupportmaybeneededtoensurethateveryinvestmentadvancesinthedesireddirection.Inothercases,eventhoughsignificantcarbonpricingimprovespricesignalsinwholesalemarkets,additionalpolicysupportmaybeneededtobridgethegapbetweencurrentanddesiredlevelsofinvestmentindecarbonisationtechnologies.Withoutadjustingfortheeffectsofotherpolicies,instrumentscanalsobecomelesseffectiveovertime:carbonpricingorcarboncredits,forexample,maylosesomeoftheirefficacyasmorerenewablescomeonlineandboostthesupplyoflow-carbonenergy.Assuch,governmentsneedtobuildcomplementarityamongdifferentpoliciesandbepreparedtoadapttargetsasthesystemdevelopstopreventissuessuchasanoversupplyofcarboncreditsifrenewablesexpandmorequicklythananticipated.Itcanalsobethecasethattheeffectivenessofinstrumentsisimpactedbyearlyretirementorduetothetimerequiredforthemtogainsocialacceptance.Australiaintroducedacarbontaxin2011,thenretireditin2014,duetopoliticalcontroversysurroundingitsimpactoncoststoendconsumers,despiteitbeingregardedaseffectiveforreducingemissions.Bycontrast,theEUETSgotofftoaslowstartbutasthemechanismmatured,improvingthepricesignal,ithascontributedtocreatelong-termvisibilityforinvestors.Overall,forsupportmechanismstobeeffective,providingcertaintyinthelongruniskeytoestablishcredibilityandsecureinvestmentinlow-carbontechnologies.116114103-20406080100120-100200300400PDPPDPUSD30PDPUSD40Emission(MtCO2)Generation(TWh)WindStorageSolarBioenergyImporthydroHydroOilNaturalgasCoalEmissionsSteeringElectricityMarketsTowardsaRapidDecarbonisationChapter2–MarketsinstrumentstoacceleratedecarbonisationPAGE37IEA.Allrightsreserved.VREsupportschemesneedtoencouragelong-termcertaintyandsystemintegrationIntheirbidtode-riskinvestmentandacceleratedeploymentoflow-carbontechnologies,policymakershaveimplementedavarietyofrenewableenergypolicyinstruments.Toensurereturnoninvestments,oneoftheearliestwerefeed-in-tariffs(FiTs),whichguaranteedrevenuesforeachunitofpoweroutputoverthelifetimeofagivenplant.Morerecentinstrumentsfocusmoreonenablingactorstohavedirectinteractionwiththewholesalemarket(e.g.market-basedpremiums,contractsfordifference[CfDs]andauctions).Themeritsandshortcomingsofeacharediscussedbelow.Byprovidinglong-termrevenuecertainty,FiTs(whetherforlarge-scalegenerationordistributedsolarPV)wereaneffectivechoiceintheinitialstagesofpolicyinterventionastheysupporteddevelopmentofnewtechnologiesandassociatedindustries.Asthesetechnologiesmatured,itbecamenecessarytolimitrisingpolicysupportcostsandsystemintegrationcoststhatwerepasseddirectlyontoconsumers(throughenergybills).Inturn,theseinstrumentswereadaptedtoencouragesystemintegrationofVREgenerationtechnologiesthathadreachedadegreeofmaturity.Monitoringincreasesinpolicycostsintermsofthedesiredpolicyoutcomeandbeingreadytoadaptsupportmechanismsareessentialforallpolicyinstruments.Forexample,inGermany,thechallengeofcomplementarityamonginstrumentsbecameevident.WhilethefirstgenerationofpolicysupportmechanismsboostedinstalledcapacityofVRE,overallpowersectoremissionsremainedrelativelystableandthepublicprotestedagainstrisingconsumerbills.ThelimitedimpactofVREsupportonemissionsreductionneedstobeevaluatedinthebroaderpolicycontext–includingpoliciestophaseoutnuclearandcoalgeneration.Moreover,therapidbuild-outofrenewableenergyinGermanyhadtheunexpectedeffectofreducingthepriceofcertificatesintheEUETS.Withinitsmaininstrumentforrenewableenergysupport,theRenewableEnergyLaw(EEG),Germanysubsequentlyshiftedtomoremarket-drivenpolicies.Eventhislawhasbeenreformedseveraltimestoreducepolicysupportcosts,drivenbyrecognitionthatmodifyingFiTsadministrativelywasnotenoughtoaccountfortherapiddropintechnologycosts.In2012,followingtherapidbuild-outofVREcapacity,theGermangovernmentreformedtheEEGtoremovetheguaranteeofpurchasebythesystemoperatorandgavegeneratorstheoptiontoselltheiroutputdirectlytootherparticipantsinthewholesalemarket,earningamarket-basedpremium(i.e.afeed-inpremiumorFiP).Toslowtheriseinpolicysupportcosts,a2014reformintroducedtechnology-specificcorridorsandmaximumceilingsforinstalledcapacitypertechnology.ThisreformalsoincludedtheobligationforallnewlargegeneratorstoselltheiroutputdirectlyonthemarketSteeringElectricityMarketsTowardsaRapidDecarbonisationChapter2–MarketsinstrumentstoacceleratedecarbonisationPAGE38IEA.Allrightsreserved.(undertheFiPmodel),furtherlimitingtheimpactcapacityincreaseswouldhaveonendconsumerbills.In2017,Germanyintroducedasystemofrenewablecapacityauctions,whichalloweddeveloperstobidfortheirrequiredlevelofsupportinformedbypricesignals,markingashiftfromadministrativelydeterminedlevelsofsupport.Mostrecently,on1July2022,theEEGsurchargeonendconsumerbillswasphasedoutandthepolicysupportcostswillnowbecoveredthroughdedicatedstatefundsforenergyandclimate.PowersectoremissionintensityvsEEGcoststoendconsumersinGermanyIEA.Allrightsreserved.Sources:IEAWorldEnergyStatistics2021edition,IEARenewablesInformation2021finaleditionOthergovernmentshavedevelopeddifferentpoliciestosupportdeploymentofrenewableenergyinconnectionwithmarketrevenues.AcrossmuchoftheUnitedStates,buildingcomplementaritybetweenfederalandstate-levelactionhasbeenimportant.IntroductionofFederalProductionTaxCredits(FPTCs)hasprovidedlong-termrevenuecertaintytoaddressthecapital-intensityofrenewables.Parallelroll-out,bystates,ofrenewableportfoliostandards(RPS)andtheirassociatedgreencertificateshasencouragedwholesalemarketintegration.InEurope,ashifttowardsCfDshasproveneffectiveforenablingbothlong-termrevenuecertaintyandabetterdegreemarketintegrationthanthepreviousFIT-basedschemesforlargegenerationtechnologies.Theoverarchingchallengeindesigningpolicysupportinstrumentsisfour-fold.Policymakersmustensureinstrumentsfordecarbonisation:meetthepolicyobjectivecost-efficiently;providesufficientlong-termvisibility;canbeadaptedtoreflectchangesinthepowersystem;andarecompatiblewithotherinstrumentsthataddressotherpolicyobjectivesinthebroaderpolicycontext.IntheUnitedStates,thismultifacetedchallengehasmotivateddiscussionofashiftfromremuneratingsolarPVbasedonthelevelisedcostofenergytoapplying010203040506070800.00.10.20.30.40.50.6200320042005200620072008200920102011201220132014201520162017201820192020EUR/MWhEEGReformTonnesCO2/MWhEUR/MWhSteeringElectricityMarketsTowardsaRapidDecarbonisationChapter2–MarketsinstrumentstoacceleratedecarbonisationPAGE39IEA.Allrightsreserved.methodologiessuchasthe“valueofsolar”,whichaccountsfortheenergyvalueaswellasothercontributionsorimpactsonsystemcosts.InGermany,followingtheannouncementofcoalphase-outsby2030,experiencefromthefirstroll-outofVREcapacityonthepriceofEUETScertificateshasbeentakenintoaccountandisexpectedtobereflectedinthewithdrawalofcertificatesfromtheEUETSmarketstoensurethemechanismremainseffective.DecarbonisationinstrumentsshouldencourageinvestmentsofhighestvaluetopowersystemsIntroductionofFPTCshasbolsteredmuchoftherenewablecapacitybuild-outinTexas,withthefederalsupportmakingsuchprojectsviable.Inaddition,instateswhereRPSschemeshavebeenintroduced,utilitiesorload-servingentitiesaremeanttocoveracertainpartoftheirloadthroughrenewablegeneration.Byprovidingadditionalrevenuesontopofenergyonlywholesalerevenues,thesaleofrenewableenergycertificates(RECs)throughRPShelpsdeveloperstocovertheircosts,inpartbypassingsuchcostsontoendconsumers.Together,theseinstrumentshelprevealgeographicareaswhereinvestmentswouldbringmostvaluetothesystemandreducetheshareofadditionalcostthatgetspassedtoconsumers.Thecaseofwindpowerisinterestinginthatplanninginvestmentintheareasthatcandelivergreatestvaluemaynotalignwithastrategythatisbasedsolelyonthepotentialforgenerationinareaswithveryhighwind.InTexas,whiletheregionwiththehighestwithresourcesisinthenorthofthestate(theso-calledPanhandleregion),asignificantamountofinvestmenthasgonetothesouthandcoastalregions.ThisreflectsthatthelackofinterconnectioninthePanhandlemeanspriceswilloftengobelowzerowhereas,despitehavinglowercapacityfactors,thesouthandcoastalregionshaveconsistentlyhigherpricesbecauseoftheirproximitytolargeloadcentres.AsthecostofacquiringRECsissocialisedamongeachutilities’consumers,investmentsinareasthatdeliverhighermarketpricesyieldabetterdealforendconsumers.Texasmarket-basedsupportmechanismshavebeeninstrumentalindirectinggenerationinvestmentstowheretheybringthegreatestvaluetothesystemasshownintheimagebelowdepictingday-aheadpricedurationcurvesintheERCOT.Ingeneral,thisinitialapproachisbeneficialintermsofreducingthecostofpolicysupportthatneedstobesocialisedandinlimitingtheneedforgridexpansion.SteeringElectricityMarketsTowardsaRapidDecarbonisationChapter2–MarketsinstrumentstoacceleratedecarbonisationPAGE40IEA.Allrightsreserved.ERCOTday-aheadpricesdurationcurveperhubinJanuary2021IEA.Allrightsreserved.Source:ERCOT(2021),Marketprices.Similarly,Germany’sintroductionofFiPs(in2014)encouragedinvestorstoselectthetechnologiesandlocationsinwhichVREtechnologiesgeneratethemostwhendemandishigher,therebyincentivisinginvestmentintherighttechnologies,whilemaximisingvalueforthesystem.Ratherthanafixedamountontopofmarketrevenues,GermanyusesaslidingpremiumsystemthatcompensatesthedifferencebetweentheaveragevalueofelectricitygeneratedpertechnologyandtheperMWhrevenuethatgeneratorsinthattechnologyclasswouldrequiretorecovertheircosts.Premiumsaredeterminedasthedifferencebetweentheweightedmonthlyaverageelectricitypriceobtainedbyallgeneratorsusingthesametechnology–forexample,wind–andtheirrequiredstrikeprices.Thismeansnewgeneratorssitedsuchthattheygenerateattimeswhenwholesalepricesarehighestcanmakeadditionalprofits.Asshowninthefigurebelow,Germany’sslidingpremiumsystemencouragesdeveloperstoplacetheirplantsaccordingtowhentheyprovidethehighestvalueforthesystem.Forexample,newer,largerwindgeneratorsareoptimisedforlowerwindspeedswhileolderversionsrequirehigherwindspeeds,whichtypicallycorrelatewiththehoursinwhichthewholesalepriceislower.In2021,itbecameclearthatbeingsitedinmorediversifiedlocations,newwindgeneratorswereabletocapturebetterrevenueswhilethemarketvalueofolderwindgeneratorswaslowerinpartbecauseoftheamountofpreviouslyinstalledcapacitythatgeneratesduringtimesoflowprices.-20801731USD/MWhPanhandleSouthSteeringElectricityMarketsTowardsaRapidDecarbonisationChapter2–MarketsinstrumentstoacceleratedecarbonisationPAGE41IEA.Allrightsreserved.Overall,encouragingdeploymentofnewgenerationwhereitaddsthemostvalue–i.e.targetinglocationswheregridcapacityisavailable–improvestheintegrationofrenewablesandreducesthecostofgridexpansion.Marketvalueofdifferentlocationsforold,smallerwindturbines(left)andnew,largerwindturbines(right)in2021IEA.Allrightsreserved.Source:Evervis/Anemos(2021),Marketvalueatlas.Long-termauctionsproviderevenuecertaintyandallowgeneratorstorevealrequiredlevelofsupportAuctionmechanismshaveprovenaneffectivemeanstoincentivisedecarbonisationofthepowersystemwhilehelpingco-ordinatethepaceofgriddevelopment.Incontrasttootherinstruments,auctionsprovideprivateactorsanincentivetocompetitivelydeclaretheirrequiredlevelofsupport,whilethegovernmentorauctionorganiserhasthetaskofidentifyinghowmuchcapacityisneededorhowmuchbudgetisavailable.Forexample,Germany’spay-as-bidpremiumauctionsencouragedeveloperstocompeteamongthemselvestoidentifywhoneedstheleastsupporttoinvestinnewgeneration.DevelopersthatSteeringElectricityMarketsTowardsaRapidDecarbonisationChapter2–MarketsinstrumentstoacceleratedecarbonisationPAGE42IEA.Allrightsreserved.placeplantsinlocationswheretheywillproducemostintimesofhighdemandcanstillcaptureextrarevenueswhilealsodeliveringmorevaluetothesystem.Theauctions’pay-as-bidnatureandselectionofthecheapestbiddersminimisesthetotalcostofthesupporttothesetechnologies.UndertheUnitedKingdom’sCfDscheme,whichoperatesasalong-termauction,generatorsbidforaspecificstrikepricethatwouldallowthemtorecovertheircostsacrosstheplant’slifetime.Theysubsequentlyreceivethedifferencebetweentheirdeclaredpriceandtheobtainedmarketprice.Whilethissystemprovidesagreatdealofcertaintytodevelopers,italsolimitstheriskofspirallingpolicysupportcostsasitcapsearningsatthedeveloper’sdeclaredstrikeprice.Incontrasttomanyothermarketmechanisms,CfDshaveaclawbackmechanismtoavoidwindfallprofitsovertheinvestmentperiod,whichactsasahedgeintimeswhenthewholesalepriceisveryhigh.InFrance,CfDsforwindandsolarPVareexpectedtocontributeapproximatelyEUR14.4billiontopublicfinancesin2021and2022,accordingtotheFrenchAssociationforWindEnergy.ThisstemsfromthefactthattheCfDswereestablishedinpreviousyearswhenaveragewholesalepriceswereEUR50/MWhandtheCfDstrikepricewassetataroundEUR60/MWh.Fornumerousreasons,theaveragewholesalepricein2021wasaroundEUR108/MWh,andspikedtoEUR231/MWhinthefirsttrimesterof2022.TheestimatedsumofEUR14.4billionincludesEUR3.3billioninexcessprofitsin2021thatsolarandwindproducerswillneedtopayback,EUR5.1billionofCfDsupportthatwillnotneedtobepaidoutin2022andanestimatedEURsixbillionthatproducerswillneedtotransferbackduetoexcessrevenuesin2022.Technology-specificandneutralmechanismsdeliverdifferentoutcomesintermsofcostandinnovationWhendevelopinginstruments,andchoosingamongoptionsthataretechnology-neutralortechnology-specific,itisimportanttoconsiderthedifferentoutcomeseachleadsto.Technology-neutraloptionstendtoleadtolower-costrenewabledeploymentintheshorttermasmaturetechnologiesarelikelytowinthebids.Bycontrast,technology-specificoptionsmaybebestsuitediftheobjectiveistostimulatedevelopmentofnascenttechnologiesandencourageinnovationwithinspecifictechnologies.Strikingastrategicbalancebetweenthesetwoinstruments,suchthattheyencouragetherightmixoftechnologiesandleveragecomplementarities,requiresthatpolicydecisionsbeinformedbylong-termsystemplanningexercises.SteeringElectricityMarketsTowardsaRapidDecarbonisationChapter2–MarketsinstrumentstoacceleratedecarbonisationPAGE43IEA.Allrightsreserved.Inrecentyears,theNetherlands,MexicoandChilehaveintroducedtechnology-neutralauctionswiththeaimofreducingthecostofpolicysupportwhiletaskingdeveloperswithidentifyingboththelocationsandtechnologiesthatwillbringthegreatestvalueindifferentpartsofthegrid.TheNetherlands’technology-neutralauctionissimilartotheGermanslidingpremiumsysteminthatitallowsforsurplusrevenues;however,italsoincludesafloorprice,whichessentiallyprecludesthepaymentofsubsidyinnegativehours.Anadditionalcontrasttootherauctiondesignsisthattheamountofsupportawardedisbasedonavailablebudgetratherthanonprocuredcapacity.Todate,useofthisapproachtotechnology-neutralauctionsinGermanyandtheNetherlandshastypicallyfavouredsolarPVprojects,whichwithoutothertechnologiestobalancethemixcanleadtoparticulargridintegrationproblems(e.g.increasingcongestionatthedistributionnetworklevel).Incontrast,byincorporatinglocationalelementsthroughzonalpricing,technology-neutralauctionsinMexicoandChilehaveattractedavarietyofrenewableenergytechnologies.InMexico,load-servingentitiesandlarge,qualifiedmarketparticipantswereallowedtobidforavarietyofbundledproductssuchasenergy,firmcapacityandrenewableenergycredits.Moreover,thelong-termauctionsbuiltonthestrengthsoftherecentlyintroducedlocalmarginalpricingsystem,whichaccountsforenergy,congestionandlosses.Thismultifacetedapproachencouragesinvestorstolocatenewgenerationinareasthatlowerthecosttothegrid.Overall,addinglocationaladjustmentcomponentsfornewrenewableprojectsencourageddevelopmentofsolarPVinareaswithgreatergridavailabilitywhiletheintroductionofafirmcapacitycomponenthasincentiviseddispatchablegeothermalprojects.AcrossLatinAmerica,theintroductionoftechnology-neutralauctionshasstimulatedrapidexpansionofrenewablescapacitywhilekeepingpolicysupportcostslow.Ultimately,triggeringdiversifiedinvestmentsintechnologiesandatlocationsthatprovidevalueislinkedtoprovisionofspecifications(e.g.auctioningcertaindemandblocksorintroducinglocationalpricingandfirmcapacityelements).Market-basedmechanismscanprovideabetterpictureofwhattechnologiesbringmostvaluetothesystemAnotherapproachtostimulatinginvestmentistopushtheburdenofassessingwhichtechnologiesprovidethehighesteconomicnetvaluetotheprivatesectorasopposedtoconventionalauctions,whichgenerallyrelyonacentralactorsettingthepathwayforcapacityexpansionandorganisingsubsequentrounds.Thiscomeswiththeadvantageofallowingindustryandbusinessplayers,whomayhavebetterinformationthanacentralplanner,toassessthemostefficientlevelofadditionalsupport.SteeringElectricityMarketsTowardsaRapidDecarbonisationChapter2–MarketsinstrumentstoacceleratedecarbonisationPAGE44IEA.Allrightsreserved.InAustralia,introductionofthelarge-scalerenewableenergytargettogetherwithanRPSandlarge-scalegenerationcertificates(LGCs)hasfosteredadynamicmarketthatdrivesinvestmentandtasksretailerswithselectingandcontractingthemostcost-effectivecleanenergysources.ThisapproachintroducesanadditionalmeasureofflexibilityinthattheidealcontractandsupportdurationforthepurchaseofLGCsisdefinedbymarketactors(ratherthanacentraladministrator).Astheindustrydevelops,theactorsandinvestorsbuildupexpertiseandknowledgeofthemostefficientduration.Between2001and2020,thetargetandcertificatessupportedtheachievement(by2021)of33000GWhofrenewableenergy.Itshouldbenotedthatthistargethadbeenretroactivelyscaledbackfromtheoriginaltargetof41000GWhdefinedin2015.Beyond2022,theyearlytargetforgenerationfromrenewablesourceswillremainconstantat33000GWh.TheexperienceinAustraliashowsthatwhileRPStargetsmaybeusefulinpromptingprivateactorstoidentifythebestvalueprojectstocovertheircertificates,theystilldependonpolicyandpoliticaldecisionssuchasthereductionorlimitationofatarget.Andthatpolicychangesaffectthelong-termvisibilityinvestorsneedtomakeefficientdecisions.MarketinstrumentdesignshouldreflectpolicyobjectivesPolicysupportmechanismsshouldbedesignedwiththeexplicitaimofstimulatingactiontoachieveaspecificpolicyobjective.Manyofthemechanismsmentionedabovesettargetsbasedoninstalledcapacityorshareingenerationofrenewableenergytechnologiesratherthanforemissionsreduction.Ultimately,thistipssupportinfavouroftechnologiesthatwillleadtoamajorityshareofgenerationbeingprovidedbyzero-costVREswhilelimitingtheparticipationofothertechnologies–particularlyhydropowerandnuclear–thatarevitaltoreducingemissionsandaredispatchable.Asthesezero-costtechnologiestakeoverthemajorityshareofgeneration,additionalinstrumentsmayberequiredtoaddressemergingneedsforadequacyandstabilitysupportandtotriggerdeploymentofothernecessarydispatchablelow-carbontechnologies.Forexample,theauctionsystemcreatesincentivesfordeveloperstoofferthemostcompetitivetechnologytoservespecificrequirements(e.g.energydemand,firmcapacityorcleanenergy).Thebiggerchallengeforpolicymakersistoensurethatacrossallinstruments(auctions,marketpremiums,etc.),theconditionsforawardingsupportensuresmoothintegrationwiththepowersystemandavoidshiftingthecostburden(typicallytowardsconsumers)orshiftingthemeritorder(e.g.suchthatitrewardscoal-firedgenerationinsteadoflower-emissionsdispatchabletechnologiessuchashydropower,nuclearornaturalgas).SteeringElectricityMarketsTowardsaRapidDecarbonisationChapter2–MarketsinstrumentstoacceleratedecarbonisationPAGE45IEA.Allrightsreserved.Insystemsthatdeployrenewablessolelyonshort-termwholesalemarketrevenues,policyinstrumentsshouldsupporttechnologiesthatenableimprovedforecasting,balancingandsiting.Theabsenceofclearguidelinescanleadtoeitheradditionalback-upcoststhatneedtobesocialisedoradditionalgridconstraints.Adaptingmarketinstrumentswillbeessentialtoensureinvestmentinlow-carbondispatchabletechnologiesInthecomingdecade,theaccelerationofpowersystemdecarbonisationthroughgreaterVREdeploymentwillfundamentallychangehowwholesalemarketsworkandhowassetsrecovertheircosts.Thesuiteofsupportmechanismspresentedsofar,particularlythosefocusedonenergy-basedearningsandtechnologyneutrality,tendtoimplicitlyrewardtechnologiessuchassolarandwind.Bycontrast,theexampleofMexicoremuneratingenergyandfirmcapacityshowsthepotentialtoadaptthesemechanismstoalsoencouragedeploymentofotherlow-carbondispatchablegeneration(suchasgeothermalorhydropower).InsystemswithmajoritysharesofwindandsolarPV,continuedoperationandnewinvestmentindispatchablelow-carbontechnologiesisbecomingincreasinglydifficult.Toensureavailabilityofsufficientdispatchablecapacityatcriticalhours,supportmechanismswillhavetobeadjustedtovalueattributessuchasrampingcapacityandthecontributiontosystemstability.Inspecificpowersystemregions(suchasKyushu,Japan),integratinglarge,localsharesofsolarPVgenerationhasrequiredadaptingtheoperationalpatternsoflocalpumpedstoragehydropower(PSH).Unlesspolicymakerschangehowtheseassetsareremuneratedforrampingservicesandacknowledgetheircontributiontocapacityprovisions,operatorswillfinditincreasinglydifficulttokeepsuchassetsonline.Instrumentsdesignedtopromotecontinuedoperationandnewinvestmentindispatchablelow-carbongenerationshould,aswithearlierrecommendationsforVREsupportmechanisms,maximisecompatibilitywithwholesalemarketsignals.Thiswillrequireeffectivelyremuneratingtheirvaluecontributiontoadequacyanddecarbonisation.RecentIEAanalysisofeffortstodecarbonisetheKoreanpowersystemshowsthatintroducingscarcityandcarbonpricingcanimproveinvestmentprospectsindispatchablelow-carbonassetssuchashydropower,PSHandinflexibilitytechnologiessuchasbatterystorage.SteeringElectricityMarketsTowardsaRapidDecarbonisationChapter2–MarketsinstrumentstoacceleratedecarbonisationPAGE46IEA.Allrightsreserved.Projectedenergyrentsfornewinvestmentinlow-carbongenerationin2035intheKoreanpowersystemrelativetotheannualisedcostofnewentryIEA.Allrightsreserved.Notes:ComparisonofenergyrentstofixedO&Mandannualisedcapitalcost,WACC=7%.Usingsystemreferencemarginalprice(SRMC)withnocarbonpriceandUSD145pertonnecarbonprice.Source:IEA(2021)ReformingKorea’sElectricityMarketforNetZerohttps://www.iea.org/reports/reforming-koreas-electricity-market-for-net-zero.Improvingwholesalemarketsignalsandcorrectlyidentifyingthespecificpolicyobjectivesthatneedtobemet,policymakerscanintroduceadditionalsupportinstrumentsthatarecompatiblewith–andevenstrengthen(ratherthandistort)–marketsignals.Basingsupportoncriteriasuchasperformance,availabilityandcontributiontothemostcriticalsystemconditionswillbecrucialtoensurebuild-outofsufficientdispatchablelow-carboncapacitytoguaranteesystemsecurity.FinalrecommendationsTocreatealevelplayingfieldforlow-carbontechnologies,policyinstrumentsshouldensurethatwholesaleelectricitymarketsappropriatelyaccountforboththenegativeexternalitiesofCO2emissionsandthevaluethatthesetechnologiesaddtothesystem.Ininstanceswheremarketrevenuesdonotstimulateenoughinvestment,supportinstrumentsareessentialtoclosethegapandmeetpolicyobjectives.Balancelong-termrevenuecertaintywithmarketintegration:thiswillensurethatdecarbonisationinstrumentswillsupportefficientdeploymentoflow-carbontechnologies.Integratedecarbonisationmechanismswithcompetitivepricesignals:helpsreducethepolicysupportcostburdenthatmustbepassedontoendconsumers.0200400600800GasSolarWindHydroPSHBattery(USD/kW/year)2035energyrents2035energyrentswithscarcityandco2price702035energyrentswithscarcityandCO2price145Annualizedcostofnewentry(Korea)Annualizedcostofnewentry(globalaverage)SteeringElectricityMarketsTowardsaRapidDecarbonisationChapter2–MarketsinstrumentstoacceleratedecarbonisationPAGE47IEA.Allrightsreserved.Enablevaluebasedonlocationandtime:decarbonisationinstrumentsdesignshouldenablemarketparticipantstomaximisethecontributionoflocational,time-of-generationvaluetothesystemthroughnewcleantechnologyinvestments.Improvepricesignalsandmarket-baseddecarbonisationmechanisms:asvariabletechnologiestakethemajorityshareofgenerationinelectricitymarkets,refiningpricesignalsandmarket-baseddecarbonisationmechanismscancontributetoensuresufficientinvestmentlow-carbondispatchablegeneration.SteeringElectricityMarketsTowardsaRapidDecarbonisationChapter3–DistributedenergyresourcesPAGE48IEA.Allrightsreserved.Chapter3.DistributedenergyresourcesDERreshapethestructureandoperationofelectricitymarketsWhileDERexistedinthepast,theirdeploymentinelectricitysystemsisrapidlyincreasing.Todate,theircapacitytosupportbothdecarbonisationandefficientsystemoperationistypicallynotproperlyvaluedinelectricitymarkets.ToensureDERaredeployedandoperatedinmannersthatbenefitthesystem,theseshortcomingsneedtobeadequatelyaddressedinsystemplanningandmarketdesign.Generally,DERareclassifiedinthreecategories.Distributedgenerationincludesfuelsortechnologiesthatsupplypower,suchasbiomass,smallhydro,solarphotovoltaic(PV),smallwindpowerordieselgenerators.Demandresponsereferstoanumberofactionsbywhichconsumersparticipateactivelyinsystemoperation(e.g.throughenduseenergyefficiencytoreduceoveralldemandorby“shifting”loadstoreducepressureonthesystem).Storage,intheformofdevicesthattemporarily“hold”energyforreleaseondemand(e.g.electricwaterheatersorbatteries),providesanadditionalmechanismbywhichsystemoperatorscanbalanceelectricitydemandandsupplyinrealtime.DERcaninteractwiththegridinthreemainways.SomeDER(e.g.solarPV)canonlyinjectelectricity,whilesomeonlyconsumeelectricity(e.g.traditionalappliances).Somecandoboth,whichgivesthemthecapacitytoserveasstorageoptions.Dependingonsuchcharacteristics,DERcanparticipateinenergy,capacityandancillaryservicestosupportpowersystemdecarbonisationbydisplacingtraditional,fossilfuel-basedprovidersoftheseservices.TheemergenceofDERasactiveplayersinelectricitysystemsiscloselylinkedtorapidlydecliningcostofsupplytechnologies(e.g.solarPV)andaccelerateddigitalisationofthepowersystem.Inturn,DERallowenduserstoparticipatemoreactively:insteadofbeingpassiveconsumersofelectricity,theycanalsoparticipateinitsproductionandinsystembalancing.WithDERaccountingforgrowingsharesofelectricitysystems,threekeyfactorscomeintoplay.First,incontrasttolarge,centralisedpowerplantsthatfeedintothetransmissiongrid,DERareconnectedtoandinteractwiththedistributiongrid.Second,DERrepresentmillionsofsmalldevicesspreadoverwidegeographicSteeringElectricityMarketsTowardsaRapidDecarbonisationChapter3–DistributedenergyresourcesPAGE49IEA.Allrightsreserved.regions(althoughsometendtobeconcentratedinspecificareas,suchasrooftopPVinurbanzones).Finally,theirpresenceinfluencestheoperationsof–andinteractionsbetween–transmissionsystemoperators(TSOs)anddistributionsystemoperators(DSOs),givingthelatteramoreactiverolethaninthepast.WhileasingleDERhasminimalimpactinsystemoperation(andthusminimalvalue),thegrowingnumberofdevicesincreasestheirpotentialimpacts.Ifaggregated,co-ordinatedandeffectivelymanaged,DERcanhelpintegrateVRE,reducetheneedforgridupgradesandcontributetopowersystemresilience.By2050,anestimated83%ofEuropeanUnionhouseholdscouldbecomeactivethroughDERbygeneratingand/orstoringelectricityandprovidingflexibility.Capturingthisvaluewillrequirechangesinelectricitymarketdesign,whichcurrentlyreflectscharacteristicsneededforcentralisedcontrolatthetransmissiongridlevel.Goingforward,maximisingDERbenefitsrequiresfindingwaystoovercomechallengesthatareemergingwithbroadelectrificationandtheincreasedimportanceofthedistributiongridlevel.Whileincreaseddemand(duetoelectrificationofenduses)couldleadtohigherpeakloadsandgridcongestions,DERcanprovidesolutionstoalleviatetheseissues.Toovercomekeychallenges,marketdesignneedstogiveoperators(bothTSOsandDSOs)greatervisibilityofdistributedloadsanddistributedresources,beginningbyencouragingdigitalisation.Inturn,itwillbenecessarytoadapttariffdesigntoincentivisethepenetrationofDERandenabletheirparticipationwhereandwhentheycanbringvalue.Asdescribedinmoredetailbelow,facilitatinginteractionbetweenDER,systemoperatorsandaggregators,intandemwithadaptingandstreamliningrolesandprocesses,iscrucialtoensureoptimaldeploymentofDER.RapidDERdeploymentinducesashifttowardsthedistributiongridThefirstmotivationstodeployDERwereforlargeindustrialorcommercialconsumerstoincreasetheirsecurityofsupplyandprovidegridservicessuchaspeakload“shaving”oremergencydemandresponse.Recentchangesbothinpowersystems(e.g.theincreaseofsmall-scalePV)andenduses(e.g.electrificationofvehicletransportanduptakeofmanyconnectedappliancesanddevices)ledtodeploymentofamorevariedrangeofDER,withawiderapplicationscope.Scalingupofthesetechnologicalchanges,promptedinpartbyimplicitandexplicitincentivesbuiltintoregulatoryframeworks,hastriggeredstrongcostreductions,especiallyforsolarPV(bothrooftopandutilityscale)andbatteries.Inturn,atrendtostrongerinvestmentinthesenewertypesofDERhasemerged,withexpectationsforfinancingtoincreasebyafurther75%,reachingclosetoUSDonetrillionby2030.SteeringElectricityMarketsTowardsaRapidDecarbonisationChapter3–DistributedenergyresourcesPAGE50IEA.Allrightsreserved.ResidentialsolarPVtotalinstalledcosts,2010-2020IEA.Allrightsreserved.Note:DataforIndiaisavailablefrom2013.Source:AdaptedwithpermissionfromIRENA(2021),RenewableCostDatabase,accessedMay2022.ThisincreaseddeploymentofDERisnowshiftingthebalancingpointofelectricitysystemsawayfromtransmissiontowardsthedistributionlevel.IntheUnitedKingdom,forexample,theshareofcapacityinstalledatthedistributionlevelrosefrom17%in2011to35%in2020andisexpectedtocontinueincreasing.Shareoftransmission-connectedversusdistribution-connectedinstalledcapacityintheUnitedKingdom,2011-2020IEA.Allrightsreserved.Note:Otherdistribution-connectedcapacityincludescoal,oil,gas,hydro,wind,waveandtidal,bioenergy,andotherfuels.Source:IEAanalysesbasedondataadaptedwithpermissionfromUKNationalStatistics(2020),DigestofUKEnergyStatistics:electricity,accessedApril2022.Thisshiftcreatesbothshort-andlong-termchallengesforsystemoperationanddevelopment.Becauseconsumerstendtofollowsimilarroutinesanduse0100020003000400050006000700080009000201020122014201620182020USD/kWGermanyItalyIndiaCalifornia,UnitedStatesOtherUSstates0%20%40%60%80%100%2011201220132014201520162017201820192020Shareofinstalledcapacity(%)Transmission-connectedcapacityOtherdistribution-connectedcapacityDistribution-connectedsolarPVSteeringElectricityMarketsTowardsaRapidDecarbonisationChapter3–DistributedenergyresourcesPAGE51IEA.Allrightsreserved.appliancesinthesametimeperiods,electrificationofendusescancausesharpincreasesindemandatcertaintimes.Assystemoperatorsoftenlackvisibilityonthesedistributedloads,higherpeakloadscouldsuggesttheneedforgridupgrades.Distributedgenerationcanofferameanstomeetgeographicallyconcentrateddemandspikes.Butifdeployedwithouttherightsitingsignals,DERcancreatelocalimbalances,leadingtomorefrequentgridcongestioninsomeareasorexcessgenerationinothers.Theseimpactsrequirestrongermanagementofdistributednetworksandresourcesbysystemoperators,butinmostsystemstoday,loadsbehindthemeterareinvisibletooperators.TheylacktheinformationtheyneedtotapintoDERtofine-tunetheircontrol.Advancesindigitalisationgiveoperatorsnewmeanstoincreasethevisibilityoftheseresourcesandtoco-ordinatetheirgenerationorconsumptiontoprovideflexibility.CapturingthevalueDERservicesbringtothegridAsnotedabove,DERtechnologiesofferseveralbenefitsofcriticalimportancetoelectricitydecarbonisationeffortsinthattheycansupporttheintegrationofVRE,reducegridupgradecostsandcontributetohighersystemresilience.InrelationtohelpingintegratehighsharesofVREintothesystem,DERoffernewcapacitiesthatbecomeastrongsourceofflexibility.Indeed,asVREgenerationvariesdependingonresourceavailability,andaselectricitydemandchangesoverthecourseofaday–andindeedfromminutetominute–flexibilityfromDERcanbeusedtobalancesupplyanddemand.DERcanreducetheneedforgridupgradesthatcanbecomenecessarywhenbroadelectrificationincreasesoveralldemandandexacerbatespeakloads,aswellasincertaincasestosupportelectricvehicles(EV)charginginfrastructure.DeployingDERasnon-wirealternatives(NWA)canreducepeakdemandandthusthevolumeofelectricitythatmustbetransmitted,effectivelydecreasingtheneedforadditionalgridinfrastructureandloweringgridoperationcosts.Lastly,DERcancontributetoimprovingpowersystemresilience,whichistheabilityofthesystemtoreacttochangesandrecoverfromdisruptions.Abletoprovidebothback-uppowerandblackstartservices,DERcanplayanactiveroleinboostingsystemsecurity.SteeringElectricityMarketsTowardsaRapidDecarbonisationChapter3–DistributedenergyresourcesPAGE52IEA.Allrightsreserved.ConnectedDERareastrongsourceofflexibilityDiverseDERcanprovideflexibility(andhenceparticipateinfrequencyregulation)indifferentways:upwards,byquicklyinjectingmorepowerasneededorbyconsumingless,ordownwards,byconsumingmoreorinjectingless.DERthatcandrawelectricityfromthegridandstoreitforlaterre-injectionsupportloadshifting,whichhassignificantvalueinthecurrentcontextofincreasedpeakloadsaselectrificationpushesupoveralldemand.Acommonenablerforalltypesofflexibilityaretime-of-use(TOU)tariffs,inwhichpricingvariesthroughoutthedayinrelationtodemandandsupply,therebyprovidingtheadequatesignalstomarketparticipants.Thankstodigitaltechnologies,DERthatcanbetriggeredtoconsumelesswhenneededbecomeanimportantcontributortoflexibilityviademandresponse.Whenmade“smart”and“connected”throughdigitaltechnologies,threeimportantthingschangefordevices,usersandthesystemoverall.First,theuseofsuchdevicesandassociatedelectricityconsumptioncanbecloselymonitoredbyusersandbysystemoperators.Second,theycanbecontrolledremotely(againbybothparties).Mostimportantly,theycanbe“pooled”suchthatmillionsofsmalldevicescanactcollectivelyinwaysthatbenefitbothusersandthesystem.Withanticipatedtemperatureincreases,theexpectedriseinuseofair-conditioning(A/C)unitsprovidesanexcellentexampleoftheenormouspotentialofdemand-sideresponse.Traditionally,duringhotweather,A/Cunitsinworkspacesoperatemostofthedaytomaintaincooltemperatures.Aspeoplereturnhomeinlateafternoon,theyswitchonhomeunits,creatingasuddenincreaseindemandinpeakperiods,whichstrainstheelectricitysystemoverall,oftenforcingoperatorstocallonpowerplantsthatrelyonfossilfuels.Ifheating,ventilationandA/C(HVAC)units(andothertypesofdevices)areconnectedandcontrolledthroughacentraliseddigitalplatform,co-ordinatingtheiroperationcanshavepeakdemand.Providedthatincentivisingtariffsexist,ownersanduserscanbenefitbyreducingconsumptionduringpeaktarifftimes–e.g.byleveragingoccupancy-basedthermostatstoreduceoperationswhererelevant.Suchmeasureshavebeenshowntosave5-10%ofHVACenergycosts.Waterheatersareanexampleofaflexibilitytoolintransition.Traditionally,waterheatershaveprovidedbalancingservicestothegridintwoways.Duringlimitedperiodsofhighdemand,curtailingtheiroutputcontributestopeakshaving.Theycanalsoserveasatypeofthermalstoragethatabsorbsexcesselectricitywhenadvantageousforthesystem(i.e.inoff-peakperiods).Smartmeteringhasledtonewdevelopmentsinthevisibilityandcontrollabilityofresidentialhotwaterheating,therebyunlockingsignificantnewvaluefortheprovisionofflexibility.Grid-interactivewaterheaters(GIWHs)arefittedwithabi-SteeringElectricityMarketsTowardsaRapidDecarbonisationChapter3–DistributedenergyresourcesPAGE53IEA.Allrightsreserved.directionalcontrolthatcanincreaseordecreasetheirpowerorshutitonandoff,repeatedly.ABrattleGroupreportfoundthatthecombinationofpeakshavingandpeaktooff-peakarbitrage(wherecheaperheatisstoredforuseinhigher-pricetimes),providedthenecessaryfastresponseforfrequencycontrolservicewhilealsoavoidingdistributioncosts,deliveringbenefitstoboththegridandthecustomer.ThenetbenefitsfrominstallingaGIWHcanbeuptoUSD200perparticipatingunitperyear.Increasedelectrificationofroadtransportcarriessimilarloadchallengesandopportunitiesformillionsofdevicestoplayaroleindemandresponse.In2021,EVsmadeup9%ofglobalcarsales;asthisfigureincreases,EVswillbecomeoneofthemaindistributedloads.By2030,EVscouldaccountfor4%ofglobalannualelectricitydemand.However,astheirusewillbeheavilyconcentratedindaytimehoursandpeoplewillseektorechargeuponreturninghome,theycouldberesponsibleforfourto10%oftotalpeakpowerdemand.Leftunmanaged,theirchargingsessionscouldstronglyincreasetheneedforgridupgrades.Usingsmartchargingsystems,whichcontrolthetime,rateanddurationofchargingsessions,canavoidhigherpeakloadsandhelpachievethebroaderdecarbonisationpotentialofEVs.ProgrammingEVstorechargeduringperiodsoflowdemandtypicallycoincideswiththeuseoflow-emissionsourcesandcanmakeuseofelectricitythatmightotherwisenotfinda“buyer”.Thecombinationofadvancedmeteringinfrastructure,smartchargersandstrategicelectricitytariffdesigncanensurethatEVschargewiththecleanest,lowest-costelectricityavailablewhileavoidingcurtailmentofrenewableelectricitysourcesbecauseoflackofdemand.TOUtariffscanshift60%ofpowergenerationcapacityneedsforEVstooff-peaktimes,significantlyreducingpeakdemandwhilealsosupportingVREintegration.Asgridoperatorscannotcontroleachvehicleindividually,tooptimisesmartchargingoverall,aggregatorplatformsco-ordinatetheiruserssuchthateachvehiclechargesatthemostoptimaltime.AswillbediscussedinChapter5onStorage,whenadequatelyintegratedandincentivisedbyadequatepricingstructures,batteryenergystoragesystemscanprovideflexibilitybystoringexcessgenerationintimesofhighavailabilityandlowdemandanddischargingintothegridintimesofpeakdemand.Vehicle-to-grid-enabledEVs,inwhichthebatterycanbothdrawelectricityfromthegridandinjectintothegrid,willbeabletoprovidesimilarservices.DeployingDERcanreducetheneedforgridupgradesFacilitiesthatcanbeinstalledinareasoflocaldistributionortransmissionconstraintsprovidesignificantvaluetothesystem.DERcanprovidenon-wirealternatives(NWA),atypeofassetdevelopedtominimisesystemcostsbySteeringElectricityMarketsTowardsaRapidDecarbonisationChapter3–DistributedenergyresourcesPAGE54IEA.Allrightsreserved.consideringnotonlyenergygenerationbutalsotheneedtoinvestingridupgrades.TheBrooklynQueensDemandManagementProgram,initiatedin2014andextendedafteritsfirstthree-yearperiod,isasuccessfulexampleinwhichenergyefficiencymeasuresanddistributedgenerationalloweddeferralofdistributiongridupgrades.FordistributionlevelNWAs,highlightingthelocationalvalueofaDERisessential,asitvariessignificantly.Forexample,developingsolarPVinanareaofhighdemandcanlowertheneedtoincreasethecapacityofthetransmissiongrid,andbeanextremelyvaluableinvestment,eveniftheavailablesolarresourceislowerthaninotherareas.AstudybyBrown&O'SullivanfoundthatthevalueofPVvariesbyasmuchas50%betweenlow-andhigh-costnodeswithineachUnitedStatesregionaltransmissionorganisation(RTO).NWAprojectswillbecomeattractiveifmarketdesignallowstheDERownertocapturesomeofthisvalue.Tocapturethislocationalvalue,theReformingtheEnergyVision(REV)programmeinNewYorkhasreplacednetmeteringtariffsfornewDERcustomersbyaValueStack.Thestackincludessixdifferentvaluestorewardspecificbenefits,ofwhichtwotargetspatialbenefitsforlocalcongestionorgridupgradeneeds:thelocationalsystemreliefvalue(LSRV),whichisavailableinspecific,utility-designatedlocationstorewardsitingDERinlocationstheycanbringadditionalvalueto,andthedemandreductionvalue(DRV),whichiscalculatedbasedontheproject’scapacitytoreducefuturegridupgradeneeds.DERcancontributetopowersystemresilienceTraditionally,dieselgeneratorshavebeenusedasback-upgeneratorsforresilience.Otheroptionsareincreasinglyconsidered,suchasonsiterenewablegenerationtogetherwithenergystorageorthedevelopmentofamicrogrid.InsomearmybasesoftheUnitedStatesforexample,acombinationofdiverseDER–solarPV,storageandconnectedcontrols–Isbeingusedtoprovideback-up.Blackstartistheprocessofrestoringpowersupplyafteracompleteoutageinthesystem.Thisservicehastraditionallybeenprovidedbylarge,centralisedthermalplantsthatarehighvoltageandconnectedtothetransmissiongrid.Ineffect,restartingtheseplantswouldcreate“powerislands”withenoughinertiatoenergisethesystem,graduallyreconnectingotherplants.AnongoingprojectintheUnitedKingdomistestingdistributedrestartprocessestoseeifleveragingdigitaltechnologiestoco-ordinateavastarrayofverydiverseresources(naturalgasturbines,biomassgenerators,embeddedhydropowerstations,windturbinesandsolarpanels)–distributedacrossthepowersystem–canenergisethepowersystem.InMay2022,livetestinginsouthwestScotlandsuccessfullyestablishedapowerislandwithahydro-plantanchorgeneratorandintermittentwindpower.Comparedtoatraditionalblackstart,theprojectanalystsSteeringElectricityMarketsTowardsaRapidDecarbonisationChapter3–DistributedenergyresourcesPAGE55IEA.Allrightsreserved.expectpotentialcumulativeemissionsreductionof0.81MtCO2andfinancialsavingsofGBP115millionsavingsby2050.Inelectricitysystemswithincreasingsharesofdistributedgeneration,thevalueofDERtakingonthisroleishighasithaspotentialtodecreaseservicecostswhiledecarbonisingthesystem.Itrequires,however,thatprocessesbeupdatedasusingDERfordistributedrestartwouldrequiremoreandsmallerpowerislands,potentiallyoperatingatvaryingvoltagelevelswithinthedistributionsystem.RecommendationsforDER-optimisedmarketdesignThepotentialforDERtoprovidevaluableservicestosystemoperationisclear.Currentwholesaleandretailmarkets,aswellasregulatoryframeworks,however,areoftennotadaptedtocapturethebenefitsofDER.Undercurrentstructures,deploymentofDERwithouttherightincentivesrunstheriskofleadingtoincreasedcostsforgridupgrades,curtailmentofrenewableenergy,higherbalancingcosts,out-of-marketinterventionsfromoperatorsandreducedreliability.IntegratingDERstrategicallyrequiresuptakeoftherighttechnologiesandadaptationofmarketsandregulatoryframeworks.BuildingondigitalisationandthedeploymentofsmarttechnologiesareessentialpreconditionstooptimalintegrationofDER;designofmarketstructuresandtariffsisessentialtosuccess.AsitiscrucialforDERtobeabletoparticipateinelectricityandancillaryservicesmarkets,institutionalproceduresandframeworksneedtofacilitatetheirparticipation,includingbyclarifyingrolesandparticipationrules.Casestudy:DERinHawaiiDERareattheheartofdecarbonisationandgridsupportstrategiesinHawaii,whereover20%ofthehouseholdshaverooftopsolarPV.AsDERheavilyinfluencedecisionsonelectricitymarketdesign,thisislandstateoffersagoodexampleofthetransformationsneededtofacilitatelargepenetrationofDER.Hawaii’srenewableelectricitytargetsandsolarpowerpotential,combinedwiththeupcomingretirement(September2022)ofacoalpowerplantinOahu,ledHawaiianElectric(thelargestelectricitysupplier)todeviseanambitiousDER-ledstrategythataimstoincreaseDERpenetrationandmaximiseitscontributiontogridservices.SteeringElectricityMarketsTowardsaRapidDecarbonisationChapter3–DistributedenergyresourcesPAGE56IEA.Allrightsreserved.Inrecentyears,theHawaiiPublicUtilitiesCommissiondiscontinuednet-meteringtariffs,whichitfounddidnotincentiviseuserstoinjectelectricityatgrid-valuedtimes,replacingthemwithTOUtariffsandspecificincentiveprogrammes.TheBatteryBonusprogramme,forexample,providesfundingforownersofrooftopPVsystemstoinstallabattery,iftheycommittoinjectelectricityintothegrideverydayatpeaktimes(18:00-20:30).TofurtherpromoteinstallationofrooftopPV,HawaiianElectricrolledoutafast-trackapproval,calledQuickConnect,thatisapplicableonlyforareasinwhichthereis30%ormorehostingcapacity.ThehostingcapacitycanbevisualisedusingHawaiianElectric’slocationalvaluemaps.ThisconditionallowsHawaiianElectrictoensureamoredetailedreviewforthoseareasthatdonotfittherequirementandarethereforeatriskofsaturation.Additionally,newstructuresandinteractionplatformshavebeendevelopedtoenabletheparticipationofDERtogridservices.HawaiianElectric’sGridServicesPurchaseAgreement(GSPA)istechnology-neutralinthatitawardscontractstoaggregatorsthathaveGIWHs,rooftopsolarandbatterystorageamongtheirportfolios.InMarch2022,theutilitypartneredwithavirtualpowerplant(VPP)providerthatusesheatpumpwaterheatersforloadshifting,takingadvantageofexcesssolarpowergenerationintimesoflowerdemand.TheutilityisalsolookingintousingDERforNWA,includingsuchresourcesintheirintegratedgridplanningprocesses.EncouragedigitalisationtoimprovevisibilityTocreateloadforecasts,systemoperatorsuseestablishedcriteriasuchasweatherconditions,timeofday,anddayofweek(forshortterm)andmacroeconomicfactorssuchaspopulationandindustrytrends(forlongterm).WithgrowingsharesofDER,whichsystemoperatorsoftenlackvisibilityon,theseforecastsstarttolosepredictivepower.RooftopPVoffersagoodexample.ThisDERisusuallyconnectedwiththeloadbutitonlybecomesvisibletosystemoperatorswhencloudsblockthesunandthedevicesuddenlybecomesademandpoint.Incaseswherealargenumberof“invisible”DERsuddenlystartdrawingpower,systemoperatorsmayhavetouseout-of-marketoperationstomaintainsufficientreliability.Digitalisationoftheelectricitysystemiskeytogivingoperatorsthevisibilityneededtoavoidinefficientoperations.DERneedtobeequippedwithmonitoringdevicestomeasureandcollectgenerationanddemanddataseparately,andconnected(e.g.throughWi-Fi)suchthattheycanprovideandreceivereal-timedata.Havingaccesstosuchdata(whichoperatorscanacquirebyinstallingmonitoringdevices,co-ordinatingwithorpurchasingfromthird-parties,ormodellingmissingdata)allowssystemoperatorstogetvisibilityoverDER.SteeringElectricityMarketsTowardsaRapidDecarbonisationChapter3–DistributedenergyresourcesPAGE57IEA.Allrightsreserved.Onthesupply-side,thesedigitaltechnologiessupporttheinterconnectionofseveralpowerproductionunits(usuallysmallerunitsatthedistributionlevel)andconnectedendusersintoVPPs.Equippedwithacentralcontrolsystemthatexchangesandaggregatesinformationfromthedifferentunits,VPPscandrawonthevariouscapabilitiesofconnectedunitstoprovidegridservicesinaverysimilarwaytotraditionalplants.Advancedmeteringinfrastructure(AMI)andsmartmetersarekeyenablersofDER.AMImakesitpossibletomeasurecustomerdemandmorepreciselyintermsoflocationandtimeandcouldbeusedtohelpdistributioncompaniesandretailersoffermoregranularandcost-reflectivetariffstoendusers.Havingahighfrequencyofcommunication(asoftenasevery15minutes),smartmeterscanallowDERtoexchangeinformation,whichmakessuchresourcesmorevisibletooperators.Overthepastdecade,severaleconomieshaverolledoutlargesmartmeterdeploymentprogrammes;aswithothertechnologiesnowactiveinenergysystems,widerdeploymentistriggeringcostdeclines.Anoverarchingchallengeinthisareaistheneedtoensurethatdataaccessandexchangeareeffectivelyregulatedtobalancetwopotentiallyconflictingaims:a)ensuringthatoperatorsandaggregatorshaveagoodoverviewofthesystemneedsandconnectedresources;andb)thatdataprivacyofindividualsisrespectedandprotected.TheAustralianEnergyMarketOperator(AEMO)tookapositivestepinthisdirectionbycreatingaDERregistertogatherdataonDERcharacteristics,therebyenablinghighervisibilityoftheirpotential.StrategictariffdesigncrucialtooptimalDERdeploymentThegrowingsharesofDERinelectricitysystemsrequirerethinkingthedesignoftariffs.Tariffsneedtoensurethatthemarketrewardsservicesthatprovidevaluetothesystem,andthattheinvestmentintonecessaryassets,aswellastheoperationofexistingones,isincentivised.Increasingpricegranularity–whichispossiblethankstoadvancesindigitaltechnologies–allowstariffstoreflectaccuratelythetime-andlocation-dependentvalueofdemandandsupply,therebyprovidingsignalsforacost-efficientallocationofresources.AnoverarchingchallengeisthatincreasedpenetrationofDERcanleadtoadecouplingofenergycostsfromgridoperationcosts.Inessence,inreducingconsumptionofelectricityfromthegrid,DERalsolowersrevenuestosystemoperatorswhostillhavetokeepsufficientsupplyatthereadytoimmediatelymeetpeakdemand.Thismeanslowerrevenueswhilegridoperationcostsremainthesame.Thisdisconnectisdirectlylinkedtohistoricpricingstructures,whicharelargelybasedonvolumetricretailtariffs–i.e.atariffthatchargesthecustomeraflatpriceforeachkilowatthourofenergyconsumedduringthebillingperiod.SteeringElectricityMarketsTowardsaRapidDecarbonisationChapter3–DistributedenergyresourcesPAGE58IEA.Allrightsreserved.ToincentiviseefficientDERdeploymentandensurecostsarerecoveredfairly,thedifferentfactorsthatinfluencedemandandsupplyneedtobetakenintoaccount.Withincreasedgranularityofmoretypesofdata(e.g.capacity-based,time-variant,locational),themarketcanbedesignedtotailortariffstodifferentusers.WithhighersharesofVRE,forexample,tariffdesignshouldincludeincentivesthattriggerconsumptionintimesofhighgenerationofcleanenergy.Itshouldalsodiscourageconsumptionduringpeakdemand,whenoperatorsoftenhavetorelyonfossilfuel-basedgeneration.StructuringtariffstoincorporatetimeandgeographicalresolutionwillalsoincentiviseownersofconnectedDERtoparticipateingrid-friendlybehaviour.Forthisreason,retailcustomerswithDERshouldbeabletoaccessinformationthatshowshowsitingandoperationofsuchresourcesisexpectedtobenefitthesystemoverall.Todateinmanycountries,distributedsolarPVgenerationhasbeendevelopedbasedonnetmeteringschemesinwhichthegeneratorreceivesenergycreditsforgenerationbeyondwhatitconsumes(excessgeneration)thatcanbefedintothegrid.Suchschemes,especiallywhenthecreditsareawardedoverlongtimeperiodssuchasayear,oftenleadtoamismatchbetweenthevalueoftheelectricitygeneratedandtheelectricityconsumed.Incountrieswitheveningpeak,forexample,creditsearnedfromexcessPVgenerationduringthedayareoflowervaluethanthecostofelectricityneededduringpeakdemand.Intheabsenceoftimeorlocationaldifferentiationinnetmeteringschemes,thevalueofelectricityfedintothegriddoesnotincentiviseconsumptionintimesofexcessPVgeneration.Asanadditionalexample,EVownersshouldberewardedforchargingattimesofhighlow-carbonelectricityavailabilityanddiscouragedfromcharginginpeaktimesduringwhichpeakingplants–oftenfossilfuel-based–areneeded.ImplementingTOUratesisonewaytoalignactualoperatingcostswithtariffstoendusers.Numerouscasesshowthat,comparedwithflatvolumetriccharges,TOUsupportsmoreefficientsystemoperationswhileensuringpredictabilityintheretailratestructure.In2016,theCaliforniaPublicUtilityCommission(CPUC)adoptedNetMetering2.0,whichrequiredallnewcustomer-generators(representingDER)connectedtothethreeinvestor-ownedutilitieswithinthestatetotakeserviceunderaTOUrate.InthePG&EserviceareainNorthernCalifornia,theTOUrate(“E-TOU-C”)forpeakdemandinsummer(between16:00and21:00)isUSD0.42/kWhversusUSD0.34/kWhinnon-peakhours.Thetariffchangesalsoincludedaone-timeinterconnectionfeeofbetweenUSD75andUSD145.Inparallel,PG&Echangedthenettingonvolumetricnon-bypassablechargesfromannualtohourly.Thisincreasedthequantityofkilowatthourssubjecttothesechargesthatapplytoallelectricityimportedfromthegrid,regardlessoftheexportofexcessgeneration.Alookbackstudyreleasedin2021demonstratedthatwhilethisnewschemewascost-effectivetoparticipants,costsincreasedfornon-SteeringElectricityMarketsTowardsaRapidDecarbonisationChapter3–DistributedenergyresourcesPAGE59IEA.Allrightsreserved.participatingcustomersandgridoperationcostswerenotfullyrecovered.Inanongoingreviewoftheplan,NetMetering3.0,CPUCproposedareformthatwouldincreaseTOUtariffsforconsumptioninpeaktimesandaddagridparticipationchargeofUSD8/kWofinstalledsolarcapacity,aimingtoaddressequityconcernswiththeallocationofgridoperationcosts.Thisproposedreformisunderdiscussionasithasbeencriticisedforpotentiallydeterringinvestmentintorooftopsolar.Forendconsumers,continuingflatvolumetric-basedtariffsinthecontextofincreasedDERcanleadtounjustallocationofoperationalcosts.AsfewercustomersdrawonthegridwhenDERisgenerating,overallcompensationforgridoperationdeclines.Inturn,torecoupcosts,gridoperatorshavetospreadrelatedchargesamongtheconsumerswhodonothaveaccesstoDERgeneration,creatinganunfaircostburdenconsideringthatDERgeneratorsdostillrelyonthegridatcertaintimes.Toavoidthesituationdescribedabove,theEuropeanCommissionrecommendsthatinfrastructurecostsbesharedbygridusersbasedonthedegreetowhichtheirdemandcontributestopeakload.IntheUnitedKingdom,thepracticeofcostshifting–inwhichlargecommercialandindustrialconsumersseektoreducenetworkcostsbydispatchingtheirback-up,distributedunitstoreducegridconsumptionduringtheTriadhours(thethreehoursoftheyearwiththehighestdemandandhencethehighestcost)–ledOfgem(theregulator)toreviewitsnetworkcharges.Ofgemfoundthatexistingnetworkchargescreatedasituationinwhichlargecustomerswereincentivisedtoexit(i.e.dispatchtheirback-upunitsorreduceconsumption)inordertoavoidhighnetworkcosts.However,asthelowerdemanddidnotreduceoveralloperationcosts,itinsteadtriggeredastrongtransmissionchargecosttoconsumerswhocouldnotexit.Assuch,thebenefitofcostshiftingtoindividualcustomersexceededthesystembenefitfromreduceddemand,indicatingtheneedtomodifytariffsforfairerallocationofcosts.Ensuringgridoperationremainsfundedinwaysthatarefairtobothoperatorsandconsumersiscrucial.Experiencetodateshowthiscanbeachievedbyintroducingatariffcomponentthatisbasedoncapacityinsteadofonenergyflows.EnableDERparticipationinmarketsAsshownabove,DERparticipationcanaddvalueinenergymarkets–whenassociatedregulatoryframeworksandotherfactorsfacilitatetheirparticipation.Currently,manyjurisdictionsmisstheopportunitytocapturethisvaluebyimposingburdensomerequirements.ThePJM,forexample,requiresthatanyresourcewishingtoparticipateasageneratorinitsmarketsenteritsnormalqueueprocess,whichincludesatwo-phaseimpactstudyandmayalsoinvolveinstallingasecondutilityservicelineandadditionalmeasurementandverificationSteeringElectricityMarketsTowardsaRapidDecarbonisationChapter3–DistributedenergyresourcesPAGE60IEA.Allrightsreserved.equipment.AsdemandforDERconnectionsincreased,thisprocessledtosignificantqueuesanddelays,ultimatelypromptingPJMtostart(attheendof2020)aconsultationtoexplorechangestotheinterconnectionprocessandtotheplanningcommitteeendorsing(February2022)atransitionplan.SystemoperatorsshoulddesignstreamlinedprocessesbywhichsmallerDERcangainaccesstothesemarkets.Whileacceleratingapprovalofinterconnectionrequestsmaycomewithtrade-offsintermsofaccuracy(e.g.lesstimefordetailedinterconnectionstudies),linkingeligibilityforfast-trackscreenstofacilitysizeshouldlimitexpectedsystemimpacts.Someregions,suchasSingaporeandWesternAustralia,haveimplementedsimplifiedinterconnectionschemestofacilitateDERparticipationwithpositiveoutcomes.Assystemoperators,evenwiththenecessaryvisibility,cannotmanageallindividualDER,theyalsoneedtofacilitateparticipationofaggregators–i.e.entitiesthatconnectDERthroughplatformstocreatearesourceofsufficientsizeandcontrollabilitytoprovidesystemservices.Whetherindependentthirdpartiesorlocalelectricityretailers,aggregatorshavetobeabletocompeteinthemarketinatransparentandfairway.TheUnitedStatesFederalEnergyRegulatoryCommission,forexample,hasopened(inOrder2222)therighttoDERtoaggregateandparticipateinwholesalemarkets.InitsDERroadmap,WesternAustraliadefinesaggregatorsas“apartywhichfacilitatesthegroupingofDERtoactasasingleentitywhenengaginginmarkets(bothwholesaleandretail)orsellingservicestotheDSO(networkoperator)”.Theroadmapsuggestsanewstructurefortheregion,inwhichdistributedcustomersenterintorelationswithanaggregator,therebygainingtheabilitytoparticipateinmarketsandsystemservices.TheaggregatorpassesinformationfromtheDERwithinitsnetworktotheDSO,whichcananalyseandusethisinformationtoensurethereliabilityandbalancingofthepowersystem.Aspowersystemrolesevolve,facilitatetransparentinteractionandadaptprocessesIncreasedpenetrationofDERwillcontinuetoinfluencehowenergysystemsneedtoopeateinthecontextofthejust,cleanenergytransition.Nodoubt,existingroleswillevolveandnewoneswillemerge.Asmentionedabove,asconnectionstothedistributiongridincrease,thebalancingpointshiftsawayfromthetransmissiongridtowardsthedistributiongrid.ThiswillmaketheroleofDSOsmoreimportantandrequiretheirengagementinareassuchasforecastingandschedulingoflocalresources,integratingDERintobulkmarkets,optimisingofatwo-waygrid,andco-ordinatingwithTSOs.SteeringElectricityMarketsTowardsaRapidDecarbonisationChapter3–DistributedenergyresourcesPAGE61IEA.Allrightsreserved.AsinteractionsbetweenDSOsandTSOsneedtobewellco-ordinated,existingprotocolsneedtobeupdatedtoreflecttheseevolutions–andthosestilltocome.Inparticular,asTSOsandDSOswillhavetocollaboratecloselyonbalancingneedsandemergencies,theyneedclearprotocolsanddivisionofresponsibilities.Inthespringof2020,whenincreasedDERpenetrationandlower-than-expecteddemandduringtheCovid-19pandemic(20%belowpredictedvalues)ledtoworriesthathighDERinfeedwoulddestabilisepowersupply,thelackofsuchclarityinprotocolspromptedtheUKNationalGridtorequestanemergencygridcodeupdate.ThetemporarymeasureclarifiedthatNationalGridcouldinstructDSOstodisconnectdistributedgenerationasalast-resorttosecuresupply,withclearallocationofresponsibilities.Havingprovedeffective,itwasreplacedbyanenduringsolution(MeasureGC0147)in2021.Distributedsystemplatforms(DSP)–essentiallyexchangesthatcreatemarketsfordiverseenergy,capacityandancillaryservicesatthedistributionlevel–areonewaytofacilitatetheevolvingrolesofDSOs.Importantly,DSPscanfacilitatemarketparticipationbysmallresourcesinatransparentandneutralmanner,withtheDSOsplayingarolesimilartothatoftheISOorRTOatthewholesalelevel.Byco-ordinatingamongallavailablesupplyanddemandoptionsatthedistributionsystemlevel,DSPsensureefficientoperationandinvestment.Iftheyactastheaggregator,DSPsprovideanadditionallayerofoptimisationthatbringsadditionalvaluetothesystem.SuchplatformswillbecomeincreasinglyimportantwithhighersharesofDERinthesystem,ascentralisedcommandofsystemoperationatthetransmissionlevelwouldriskunacceptableerosionofthevalueofDERinvestmentsoracascadeofsystemimbalancesifDERwereimplementedincorrectly.Inenergysystemsofthefuture,controlwillhavetobepredominantlylocal,atthedistributedlevel.Transactiveenergymodels,involvingpeer-to-peerexchangeofenergyservicesamongproducersandconsumersatthedistributionlevel–andfacilitatedbyaneutralDSPthatcantakefulladvantageofnewinformationandcommunicationstechnology–showstrongpotentialtoaddressissuesthatareemergingasthecleanenergytransitionrollsout.FinalrecommendationsToensureDERcontributepositivelytodecarbonisationefforts,thefollowingconsiderationsshouldbetakenintoaccountforsystemplanningandmarketdesign:MakeDERvisibletosystemoperatorsbyencouragingdigitalisation:deployconnectedappliancesandsmartmeteringinfrastructuretoensureoperatorscanefficientlyengageandcontrolDER.Ensuretransparentdataexchange,whileprotectingdataprivacy.SteeringElectricityMarketsTowardsaRapidDecarbonisationChapter3–DistributedenergyresourcesPAGE62IEA.Allrightsreserved.DesignelectricitytariffstoensureoptimaluseofDER:reviewvolumetricpricingstructurestoensureafaircostallocation.Developpricingstructuresthatincentivisetheuseoflow-carbonelectricityandleveragedatatointroducegranularpricingthatreflectsthevaryingvalueoflocationsorperiods.FacilitateDERparticipationinelectricitymarkets:streamlineandreviseconnectionschemestoeaseintegrationofsmallersizeofDER.Recognisetheroleofaggregatorsasprovidersofgridservicesandenabletheirparticipationinmarkets.AdaptprotocolsandprocessestosupportincreasedpenetrationofDER:acknowledgetheincreasedimportanceofDSOsbyrevisingprotocolstoencourageincreasedco-operationwithTSOs.ConsidercreatingDSPstoincreasecontrolatlocal,distributedlevel.SteeringElectricityMarketsTowardsaRapidDecarbonisationChapter4–StorageindecarbonisingpowersystemsPAGE63IEA.Allrightsreserved.Chapter4.StorageindecarbonisingpowersystemsTakingadvantageofstoragefordecarbonisationAnincreasinglybroadrangeofenergystoragetechnologiesarebringinguniquecapabilitiestopowersystemsand,importantly,arebecomingmorecost-effective.Batterystorageoptions,inparticular,arematureenoughtobedeployedatdifferentscalesandinmultiplelocationswhilerespondinginmorerefinedtimeperiods.Withintherangeoftechnologiesthatcancontributetomaximisingtheuseoflow-carbonelectricity,storageofferstheabilitytoconsumeandre-injectelectricitywhenneeded,therebyincreasingsystemflexibilitytoachievedecarbonisation.Deployingstorageintoday’selectricitymarketsiscomplex,particularlyasseveralregulatoryframeworksandmarketarrangementsarestillbasedonkeyfeaturesofoldertechnologies.Storage,ingeneral,stillfacesbarrierssuchasdoubletaxationand,underexistingarrangements,newstoragetechnologiesfacelowvisibilityoftemporalandlocationalsignalsaswellashighparticipationrequirementsinvariouspowersystemservices.Moreover,knownmarketimperfectionslinkedtodecarbonisationneedtobeaddressedtoreducetheriskthattheflexibilitystorageprovidescouldleadtoworseemissionsoutcomes.Severalmeasurescouldmakethevariousservicesstorageoffersmorecost-effective,therebystimulatingtheiruptakeinpowermarketsgearedtowardsdecarbonisation.Removingfeaturessuchasdoubletaxationisoneexampleofwaystoimprovetheefficiencyofstorageoperations.Pricesignalsthatpromptstoragetochargewhengenerationemissionsarelowanddischargewhenemissionsarehigherisanother.Morebroadly,facilitatingdifferentmodelsofparticipationcanopenupmorerevenuestreamsforstorageassets.Thiscouldbedonebyadjustingminimumsizeanddischargedurationrequirements,appropriatelyremuneratingfastresponse(atshortertimeperiods)inwholesalemarketsorinfrequencyregulationproducts,orincreasingthevisibilityoflocationalsignalsthroughspatialgranularityorlocation-specifictenderstoincentiviseprovisionofnetworkcapacity.SteeringElectricityMarketsTowardsaRapidDecarbonisationChapter4–StorageindecarbonisingpowersystemsPAGE64IEA.Allrightsreserved.ValueofstorageandtrendsindeploymentStorageprovidesmultiplevaluestodecarbonisingpowersystemsTodate,intheirbidtodecarboniseelectricitysystems,mostcountriesfocusonincreasingVREtechnologies.Thisispushingupdemandforflexibilityassetsandservices,inturnopeningnewpossibilitiesforenergystorage,whichcanprovidedifferentservicesatvaryingspeedsanddischargedurationperiods.Capacitors,flywheelsandbatteriescanperformsplit-seconddischargecyclestosupportvoltageandfrequencyregulation.Dependingontheirsize,batteries–whenpairedwithVREgeneration–canhelpreducegridintegrationcosts.Largestorageoptions,suchascompressedairenergystorage(CAES),PSHorlargebatteries,offerdischargecyclesoflongerdurationthatcanhelpinwholesalepricearbitrage.Storagetechnologiescanevensupportdeferralofnetworkinvestments,especiallywhenperiodsofexceptionalpeakoccurforonlyafewhoursannually.Inhelpingreducesystemcosts,storagecanlowertheaveragecostpassedontoconsumers.StoragetechnologiesandpotentialpowersystemapplicationsbasedonsizeanddischargetimesIEA.Allrightsreserved.Notes:TandD=transmissionanddistribution;CAES=compressedairenergystorage;SMES=superconductingmagneticenergystorage.Source:IEA(2014),ThePowerofTransformation:Wind,SunandtheEconomicsofFlexiblePowerSystems.Globally,PSHcurrentlyaccountsformorethan90%oftotalstoragecapacity.AsitsuseoflargeturbinesmakesPSHsimilartogenerationtechnologies,mostmarketarrangementsvalue(andremunerate)storagebasedonconventionalSteeringElectricityMarketsTowardsaRapidDecarbonisationChapter4–StorageindecarbonisingpowersystemsPAGE65IEA.Allrightsreserved.characteristicsoflargevolumesandlong-durationdischarge.Thisfailstocapturethemultiplevaluesthatnewstoragetechnologiescandelivertomodernelectricitymarkets,particularlyastheymatureandbecomemorecost-effective.Historicaldeploymentofstoragebytechnologytype,1950-2020IEA.Allrightsreserved.Source:IEAanalysisbasedonDOEGlobalEnergyStorageDatabase.RecentdevelopmentscreateopportunitytoexpandtheroleofstorageAmongdifferentstoragetechnologies,batterieshavefollowedthetechnologypathofinnovation,developmentanddeploymentleadingtomassivecostreductions.Mostnotably,lithium-ionbatteriesshowa97%costdeclinebetween1991and2021,thankstoinnovationsinbothbatterymaterialsandchemistry.Betterperformanceforlowercostwarrantsfreshinvestigationofareaswherestoragecanbringvaluetotoday’selectricitysystems.Themodularityofbatteriesallowsassetstobedeployedindifferentlocationsandatdifferentlevels,frombehindthemeter(BTM)totransmissionanddistributionlevels.Inturn,batteriescanbestackedbasedontheiroptimalsizeforspecificfunctionsinthegrid,therebyensuringcost-effectiveapplicationforawiderrangeofflexibilityservices.Precisionandspeedofresponseareotherpropertiesofbatterystoragethatallowittoprovidefastfrequencyregulationorvoltagesupportinaveryprecisemanner.Thesepropertiesaresharedwithotherinverter-basedpowersystemresourcessuchassolarPVandwindgeneration.Inparallel,digitalassetoptimisationsystemshavebecomemorecommon.Byusingadvancedsoftwaretoforecastpricesfordifferentservices,alongwithdatathatrevealbatteryhealthandprogressionofchargeanddischargecycles,operatorscouldoptimisemicro-transactionsandmaximiserevenues,helpingbringbatterystoragetechnologiesintothemarket.02040608010012014016018019501960197019801990200020102020GWChemicalenergystorageThermalenergystorageFlywheelCompressedairenergystoragePumpedhydrostorage02040608010012014016019501960197019801990200020102020GW012345678919501960197019801990200020102020GWSteeringElectricityMarketsTowardsaRapidDecarbonisationChapter4–StorageindecarbonisingpowersystemsPAGE66IEA.Allrightsreserved.Todate,batterystoragehasbeenmostlydeployedashybridsorinprovidingfrequencyregulationsupport.IntheUnitedStatesalone,around4.6GWofhybridcapacityhasalreadybeeninstalled,with14.6GWintheimmediatepipelineand69GWinselectinterconnectionqueues.InSouthAustralia,a150MW/193.5MWhbatterycollocatedwithwindfarmprovidesenergyarbitrageandfrequencyregulationservices.IntheEuropeanUnion,frequencyregulationhasbeenthemaindriverforearlyinstallationsofbatterystorage.Deploymentofbatterystoragetechnologiesindifferentvaluestreams,1987-2020IEA.Allrightsreserved.Note:Eachvaluestreamshowsthemaximuminstalledstoragecapacity.Whereanassetperformsacrossmultiplevaluestreams,itscapacityiscountedineach.Source:IEAanalysisbasedonDOEGlobalEnergyStorageDatabase.Despitethisprogress,moreeffortisneededtoincreasedeploymentofbatterystorage.AccordingtotheIEA’sNetZeroby2050Scenario,tosupportagenerationmixthatcanachievenetzeroemissionsbythattime,globalstoragewouldneedtobearound600GWofcapacityby2030–amassiveexpansionfromthecurrentinstalledcapacityofaround20GW.Atpresent,differentjurisdictionsareprovidingdirectincentivestoincreasebatterystorageuptake.Subsidiesforgrid-connectedandPV-connectedbatteryhavebeenputinplace,forexample,bytheAustralianCapitalTerritory,BerlinandBavaria.Financialincentivesmustbeconsideredinthecontextofbroadersystemobjectives,however.IfgearedtowardsBTMstorage,incentivesmayencourageuptakewithoutrespondingtoactualsystemneedsandmayinternalisethebenefitsonlytotheenduser.Thisrestofchapterfocusesonencouraginguptakeofstoragethroughthemarket,bydesigningfeaturesthatreflectthesystemneeds.ConsideringthatasignificantamountofstoragehasalreadybeeninstalledBTMandfordistributionlevel,associatedopportunitiesandchallengesfortheseapplicationsarecoveredinChapter3DistributedEnergyResources.Analysisandrecommendationsinthischapterfocusprimarilyonthetransmissiondomainordistributionlevelstorageparticipatinginthisdomain.05001000150020002500300035004000Wholesalearbitrage/renewablessupportAncillaryservicesTransmissionsupportDistributionsupportBehind-the-meterOthersMWZinc-basedbatteryNickel-basedbatteryElectro-chemicalcapacitorLithium-ionbatteryHydrogenstorageFlowbatterySodium-basedbatteryLead-acidbatterySteeringElectricityMarketsTowardsaRapidDecarbonisationChapter4–StorageindecarbonisingpowersystemsPAGE67IEA.Allrightsreserved.Marketdesignforcost-effectivestoragedeploymentLeveragestoragethroughdecarbonisationinstrumentsThebenefitsofstoragecomewithaninherentchallenge:becauseoflossesinthechargingcycle,overallstorageincreaseselectricityconsumption.Inturn,dependingonthegenerationmixfeedingintostorage,thechargecyclecanpushupemissions.Undercurrentmarketconditionsforcertaincountries,itspricearbitrageoperationwouldlikelytriggerchargingwhentheelectricitypriceislowbutemissionsarehighanddischargingwhenthepriceishighbutemissionsarelow.Withoutstrategicdecarbonisationmeasures,marketincentivesstimulatestorageoperationsthatworkagainstemissionsreductiontargets.Inapowergenerationfleetcomposedmostlyofcoalandgas,forexample,chargingwouldlikelybetriggeredwhencheapbutcarbon-intensivecoalisdominantwhilestorageresourceswouldbecalledupontodischargeduringpeakperiodswhentheywouldpushoutlesscarbon-intensivebutmoreexpensivenaturalgas.IntheUnitedStates,diversegenerationmixesindifferentlocationscouldresultinstorageoperationshavingaverageemissionsofupto450kgCO2/MWhofelectricitystoredandmorethan12ktCO2emissionsperyear.Forscale,thisisequaltoaround60%oftotalemissionsforthestateofKansasin2020.EstimatedinducedcarbonemissionsofstoredelectricityintheUnitedStatesperkilowatthourandperyear,2017StorageCO₂emissions(kg/MWhofdeliveredenergy)SteeringElectricityMarketsTowardsaRapidDecarbonisationChapter4–StorageindecarbonisingpowersystemsPAGE68IEA.Allrightsreserved.IEA.Allrightsreserved.Source:IEAanalysisbasedonandadaptedfromHittingerE.andAzevedoI.(2017),EstimatingtheQuantityofWindandSolarRequiredtoDisplaceStorage-InducedEmissions.Copyright©2017AmericanChemicalSociety.Governmentsneedtoimplementpoliciesthatwillleveragetheflexibilitybenefitofstoragewithouttheemissionscostundermininglong-termgoals.CarbonpricingisonemechanismtodecarbonisethepowersystemwhilemaintainingmarketefficiencyasdescribedinChapter3onPolicyInstruments.Otherinstruments,suchasRPS,auctionsorcapacitypayments,canhelpbybringinginlow-carbontechnologiesthatmayhavehighcapitalcostsbutloworzerofuelcostsandlowemissions.Suchpolicyinstrumentscanhelpensurethatarbitrageoperationshelpoptimisetheconsumptionoflowemissionselectricity.TomeetbothaimsforhighsharesofVREandstricteremissionsstandards,Californiamadeflexibilityaprioritywhileimposingcostsonusingnaturalgas.InsouthernCalifornia,retrofittinggasturbineswithbatterystorage–whichcanrespondtofrequencyregulationandspinningreserves–helpedminimisetheuseofturbinesandreduceemissions.Whengasturbinesaredeployed,thestorageactsasreservecapacitysuchthatmoreefficientunitsdispatchuptofullloadinsteadofmoreturbinesrunningatlowercapacity.Thisapproachalsoleavesspaceforspinningreserves.AddressoutdatedparticipationfeaturestoleveltheplayingfieldSomefeaturesofservicesthatkeepelectricitysystemsrunningsmoothlystillreflectoperationprotocolslinkedtoconventionalgenerationtechnologies–andmayposebarrierstoemergingtechnologies.Priortomarketrestructuring,forexample,frequencyregulationwasanoperationalrequirementforgenerators.Asmarketswereliberalised,theneedtodefineancillaryservicesbecameclearandseveralaspectsofserviceprovision(e.g.minimumsize)wereanchoredtotheAnnualstorageCO₂emissions(tonnes/yr)SteeringElectricityMarketsTowardsaRapidDecarbonisationChapter4–StorageindecarbonisingpowersystemsPAGE69IEA.Allrightsreserved.featuresoflargegeneratingassets.Storageisamongtheemergingtechnologiesthatmakeitnecessarytoreassessthesefeaturestofacilitatemarketparticipationofallassetsthatcanbringvalue.In2020,theUnitedStatesFederalEnergyRegulatoryCommission(FERC)issuedOrder841,mandatingregionalsystemoperatorstoremovemarketparticipationbarriers.Bytargetingareassuchasminimumthresholds,participationmodels,de-ratingandbiddingparameters,theordermakesiteasierforstorageassetstobidintoenergyandancillaryservicesmarkets.Thisstimulatestheirdeploymentwithoutsettingspecificprocurementtargets.Thekeyinspecifyingmarketservicesistoensuretechnologyneutralityandreadinesstoadapttotechnologychangesthatcanbringmorecost-effectivesolutions.Oneapproachtoaddressbarriersofmarketfeaturesistocreatearrangementsaroundminimumthresholds.Forexample,in2018,PJMinitiallyrequired10hrsofminimumdischargedurationtoqualifyforcapacitypayments.Giventhatcurrentbatterytechnologiesoftenbecomelesscost-effectivebeyondthe4-hrduration,thisrequirementreducedtheirparticipation.PJMhassincechangedthisruleandadoptedaneffectiveload-carryingcapability(ELCC)schemeandadjustedpaymentstoreflecttheservicethatassetsareabletoprovidetothesystemannually.Nowthatthemarketsupportsparticipation,forits2024rating,a4-hrstorageassetwouldreceive82%ofthepaymentmadetoa10-hrstorageassetforitsservices.Allowingaggregationofdistributionlevelassetstoovercomeminimumvolumeordispatchdurationlimitations,orreconsideringpowerexportrestrictionsforBTMassetsareotheroptions.LeveragingtheexcesscapacityofbatterystorageassetsdeployedasBTMorinthedistributiongridcouldhelpaddressflexibilityrequirements.Forexample,in2019,theUnitedKingdomopenedwideraccessforparticipationinthebalancingmechanismtoaggregatorsactingas“virtualleadparties”(VLP)thatco-ordinatetheresponsesofDER,includingsmaller-scalestorageassets.Suchinstrumentssupportawiderrangeofparticipationofflexibletechnologiessuchasstorageandalsoleveragevarioussourcesofinvestmentfromdifferentactorsinthesystem.Openingthesemarketstodiverseparticipationmodelsalsohelpsconcretisetheideaofrevenuestacking,whichcanincentivisestorageuptake.SteeringElectricityMarketsTowardsaRapidDecarbonisationChapter4–StorageindecarbonisingpowersystemsPAGE70IEA.Allrightsreserved.Aggregatedbatterystorageresponsetoafrequencydropin26April2022IEA.Allrightsreserved.Source:IEAanalysisbasedonfromJohnsonC.(2022)KrakenFlex,withpermissionfromauthor.RationalisethecostsofstorageoperationCurrently,storageassetsparticipatingmainlyinwholesaleenergyarbitrageoftenfaceasystemicdisadvantage:storagemaybetaxedasaloadwhenitchargesandagainasageneratoratwhenitdischarges.Removingsuchdoubletaxationhelpsreducethecostsofchargeanddischargecyclesandimprovebusinesscaseofstorage.Asstorageisaflexibilityprovider,ratherthananactualfinalconsumer,reformingtaxationtoalignwithitsroleleadstofairerremuneration.Recently,theUnitedKingdomabolishedregulationsthatledtodoubletaxationasdidtheNetherlands.Policymakersneedtoalsoadaptandrationalisetariffcomponentstoreflecttheuniqueroleofstorage.Networktariffssometimeshavecomponentsthatincludedemandchargesassociatedwiththeuseoftransmissionanddistribution,aswellascomponentstorecoverthecostsforbalancingthesystem.IntheUnitedKingdom,thecostsassociatedwiththebalancingserviceuseofsystem(BSUoS)componentofthenetworktariffwillnowbechargedjustonce–whenthestorageassetexportselectricitybacktothesystem.AsBSUoSisconsideredasacostrecoverycomponent,chargingitduringelectricityimportandexportwouldbeanundueburdenonstorage.Individuallyandcollectively,suchmeasureswouldcontributetocreatealevelplayingfieldforsuchtechnologiesandcreateamoreequitablebusinesscase.SteeringElectricityMarketsTowardsaRapidDecarbonisationChapter4–StorageindecarbonisingpowersystemsPAGE71IEA.Allrightsreserved.Compensatefast-responsetimewhereapplicableAkeyvalueofstoragetechnologiessuchasflywheelsandbatterystoragesystemsistheirabilitytoreactatsplit-secondrates.Marketdesignthatappropriatelyremuneratesthisvalue–inboththewholesalemarketandforfrequencyregulation–supportstheirownmarketdeploymentandenablesintegrationofhigherlevelsofVRE.IncreasetemporalgranularityRefiningpricesignalsbyshorteningtimeperiodscanencouragehigheruptakeoffast-responseflexibleassetssuchasbatterystorage,asdiscussedintheChapter2onWholesaleMarkets.Whilesomemarketshavealreadysetdispatchperiodsasshortasfiveminutes,aligningfinancialsettlementtothesameperiodwouldhelpattractadditionalinvestmentforfastresponse.Withoutsuchalignment,pricespikesoccurringforafewminutesareaveragedoutwiththelowerpriceswithinasettlementperiod,resultinginlowerremuneration.Toaddressthis,marketssuchasPJMandtheAustralianNationalElectricityMarket(NEM),recentlyalignedtheirsettlementperiodstofiveminutes.InAustralia,thealignmentledbatterystorageoperatorstoaccruehigherrevenuesfromenergyarbitragesince2021.QuarterlyrevenuestreamsofbatterystorageintheAustralianNEM,Q12020toQ42021IEA.Allrightsreserved.Note:FCAS=frequencycontrolancillaryservices.Source:IEAanalysisbasedonAEMO(2021),QuarterlyEnergyDynamics.OpenfasterfrequencyregulationservicesAdaptingregulationtoopenupamarketforparticipationoffast-responsestorageforfasterfrequencyisanothermeanstocompensatethisimportantservice.SuchinstantaneousservicescouldsupporthigherVREinpowersystemsneedinggridstability.-10010203040506070Q1Q2Q3Q4Q1Q2Q3Q420202021AUDmillionContingencyFCASRegulationFCASCharge(negativeprices)EnergyEnergycostNetrevenueSteeringElectricityMarketsTowardsaRapidDecarbonisationChapter4–StorageindecarbonisingpowersystemsPAGE72IEA.Allrightsreserved.WhentheUnitedKingdominitiallylaunched(in2016)theEnhancedFrequencyResponse(EFR)mechanism,underwhichfulldeliveryisexpectedinonesecond,themajorityofbidsreceivedcamefrombatteries.When,on09August2019,successivetripsandlosses–includingthatof737MWofpowerfromtheHornseaplant–threatenedgridoperations,successfulactionrevealedthehugevaluestoragetothesystemservicemarket.Theimmediateresponseofbatterieswaskeytorestoringthesystem,withFirmFrequencyResponse(FFR)contributing44%fortheprimaryresponseandEFRcontributing37%forsecondaryresponse.In2021,DynamicFrequencyResponsereplacedtheEFRscheme,withbatteriesstillconstitutingthemajorityofbids.FrequencyresponseduringafaultintheUnitedKingdompowersystem,9August2019IEA.Allrightsreserved.Source:IEAanalysisbasedondatafromtheNationalGridESO(2019),TechnicalReportontheeventsof9August2019;(2019)SystemFrequency[database].CompensategeographicflexibilityStoragetechnologiessuchasbatterieshaveakeyadvantageinthat,unlikePSH,theyarenotgeographicallyconstrained.Theycanbedeployedtospecificlocationstosubstitutefortransmissionanddistribution(T&D)linesorforuseascapacitytoaddressissuessuchascongestion.Insomecases,storageisalsomorecost-effective.IntheUnitedStates,theMidcontinentIndependentSystemOperator(MISO)selectedabatteryoptiontoaddressoutageissuesonatransmissionlineinneedofredundancy,savingUSD0.8millioncomparedtoanewcircuit.Asstoragestraddlesthetraditionallinebetweengridandgenerationassets,remuneratingitscontributiontothegridrequiresclearrulesinoperationandownershiptopreventconflictsofinterestandunduemarketadvantage.IntheEuropeanUnion,TSOsandDSOsareprohibitedfromowningandoperatingstorageassetsexceptiftheyarefullyintegratednetworkcomponents(FINCs)or48.548.748.949.149.349.549.749.950.150.316:52:0016:52:0916:52:1816:52:2716:52:3616:52:4516:52:5416:53:0316:53:1216:53:2116:53:3016:53:3916:53:4816:53:5716:54:0616:54:1516:54:2416:54:3316:54:4216:54:5116:55:0016:55:0916:55:1816:55:2716:55:3616:55:4516:55:5416:56:0316:56:1216:56:2116:56:3016:56:3916:56:4816:56:5716:57:0616:57:1516:57:24Frequency(Hz)Frequencyrestoredto50Hz[16:57:15]Circuitfault[16:52:33.490]ESOinstructs1240MWofactiontorestorefrequencytooperationallimitsSuccessivetripsandlossesfromvarioussegmentsofthegridHornsealossof737MW[16:52:33.835]Recoveryduetofrequencyresponse[16:53:18]SteeringElectricityMarketsTowardsaRapidDecarbonisationChapter4–StorageindecarbonisingpowersystemsPAGE73IEA.Allrightsreserved.ifthemarketcouldnotcost-effectivelysatisfyasystemoperator’sneedsthroughanopentender.Clear,visibleandgranularlocationalsignals–throughgranularpricesorlocalisedflexibilitymarkets–canhelpmaintainthisregulatoryseparationwhileexpandingtherangeofgridcontributionbystorage.Wherestorageisneededtofunctionbothasbothgridandmarketassets,governmentswillneedtoestablishclearguidelinestoidentifywhen,whereandhoweachfunctionoperatesandisremuneratedforthevalueitcontributes.EnsurevisibilityoflocationalsignalsthroughspatialgranularityorlocalisedflexibilityservicesPricesignalsthatreflecttheactualconditionsofdifferentpointsofthenetworkencourageinvestmentforlocalflexibility,asdiscussedinmoredetailinChapter2onWholesaleMarkets.Establishinganodalpricingsystemisacommonwaytocreateatransparentsignal.Likewise,increasingthenumberofzonesinazonalmarketcanrevealdiverseflexibilityneedsofdifferentlocations.Wherelargezonalmarketspersist,networkoperatorsarebestplacedtoidentifyopportunitiesforlocalsystemservices.Opentendersforlocalflexibilitywithinzonalmarketscanincreasethevisibilityofthelocationinneedofservicewhileensuringasatisfactorylevelofmarketcompetitionamongtechnologiesandserviceproviders.InFrance,theTSOispreparingacallfortenderforlocalflexibilitybasedonapilotstudyfortransmission-levelstorageapprovedbythenationalregulator.Severalotherinstrumentsortoolsareemergingtofacilitateparticipationofstorageingeographically-specificflexibilitythatisremuneratedbysystemoperators.DSO-levelflexibilitymarketplatforms(suchasintheUnitedKingdom),TSO-DSO-levelinformationplatforms(suchasintheNetherlands)andseveralsimilarpilotplatformsofferinnovativemodels.ConsiderguidelinesfordualuseifnecessaryTheopportunityto“stack”differentrevenuestreamsisakeyopportunityforstorageoperatorstoboostbothutilisationandprofitability.Incertaincases,totapthepotentialbenefitsofstorageasacost-effectivegridassetwhileimprovingitsutilisationthroughmarketparticipation,powersystemstakeholdersmaycollectivelydecidetoallowstoragetoreceiveaportionofregulatedremunerationforthegridcapacityitprovideswhilealsoparticipatinginthemarkettomaximiseitsutilisation.Forsuchsituations,additionalrulescouldbeconsideredtomaintaincompetitioninelectricitymarketsandencourageefficientinvestmentofregulatedassets.SteeringElectricityMarketsTowardsaRapidDecarbonisationChapter4–StorageindecarbonisingpowersystemsPAGE74IEA.Allrightsreserved.Forexample,theAustralianEnergyRegulator’s(AER)sharedassetguidelineallowsnetworkserviceproviderstoutiliseregulatedassetsforunregulatedactivitieswheretherevenueforthelatterwouldbeusedtoreducetheregulatedrevenue,eventuallybenefittingtheconsumersthroughlowergridtariffs.Consideringastorageassetprovidingnetworkservices,maximisingutilisationthroughthisguidelinecouldentailparticipationinfrequencycontrolservices.However,inrecognisingoperationalissuessurroundingpotentialconflictsofinterestandcross-subsidies,distributionnetworkserviceproviders(DNSPs)werelimitedtousingstoragefornetworkservicesonlythroughprocurementfromthird-partyprovidersorring-fencedDNSPaffiliates.Thislimitsdirectownershipandcontrol,whileallowingtheassettoparticipateincompetitivemarketswhenneeded.Wherenecessary,policymakerscouldconsiderguidelinesondualusagebasedonexperiencesfromtheCaliforniaIndependentSystemOperator(CAISO)andMISOtohelpdeterminewhenandhowastorageassetcouldparticipateinamarket,andwhereandhowitrecoversitscost:Forfairremunerationofregulatedrates,thestorageasset’scapacitycomponentmustbeavailablewhenneeded–similartoanyotherregulatednetworkasset.Assuch,stakeholderscoulddefinemarketparticipationwindowsbasedonthetimeorstateofchargeofthestorageasset,oritsabilitytoberecalledfromthemarket,withactualutilisationlefttothesystemoperator.Toavoidmarketabuse,policyshoulddefinehowstorageparticipatesonthemarket.Specificassetdefinitionscouldestablishtransmissionarrangements,similartoinformationondispatchabilityandresponsiveness.Correctionsforcostinequities(e.g.avoidedinterconnectioncosts)couldbeincludedtoavoidsituationsofdual-usestorageunderbiddinginthewholesalemarket.Definitionsforcontrolcouldalsobesettoensureappropriatetransitiontothesystemoperatorwhenneeded.Finally,alife-cyclemanagementprotocolwouldbeneededtoavoidoverlyaggressivemarketparticipationthatcoulddegradetheassetandleadtoanearlierrefurbishmentcomparedwithareasonablelifespanexpectedfromatypicalnetworkasset.Policymakersshouldalsostrikeabalancebetweenprovidingregulatedremunerationandthelevelofmarketrevenuethatthestorageassetcouldaccrue.Theaimistofairlybalancesavingsthataccruetogridusersfrommorecost-effectivenetworkalternativeswithsufficientincentivesfordeveloperstoinvestinstorage.FinalrecommendationsTocapturethefullvalueofstoragetopowersystems,policymakersshouldtakethefollowingpointsintoconsideration:SteeringElectricityMarketsTowardsaRapidDecarbonisationChapter4–StorageindecarbonisingpowersystemsPAGE75IEA.Allrightsreserved.Storagemustbepairedwithdecarbonisationpolicies:marketincentiveslinkedtostorageoperationshouldbegearedtowardsdecarbonisation.Carbonpricesorothermeanstoincreasetheshareoflow-carbongenerationwithlowmarginalcostshelpoptimisestorageoperationtowardsdecarbonisation.Facilitatemarketentryandrationalisecostsbasedontheroleofstorage:removingcurrentoperationalandmarketbarriersiscriticalandimpliestheneedtoreviewminimumsizethresholds,dischargedurationrequirements,biddingparametersorotherspecificationsthatmightreduce(explicitlyorimplicitly)theparticipationofnewstoragetechnologies.Itisalsonecessarytoreviewtaxationandnetworktariffsthatmightunfairlychargestorageasbothconsumerandgenerator,andtherebyreflectitstrueroleasaflexibilityprovideratdifferenttimescales.Compensatefast-responsetime:increasethetemporalgranularityofdispatchandsettlementperiodsinthewholesalemarketandsetupfastfrequencyregulationtoincreaseincentivesforfast-responsebatteriesandtobuildastrongfoundationforhigherVREuptake.Compensategeographicflexibility:increasespatialgranularityofpricesand/oropenlocation-specificsystemservicestoensurevisibilityoflocationalsignals.SteeringElectricityMarketsTowardsaRapidDecarbonisationChapter5–AdequacymechanismsPAGE76IEA.Allrightsreserved.Chapter5.AdequacymechanismsEnsuringsystemsecurityThetrendofshiftingawayfromgovernment-run,centrallyplannedelectricitysystemstowardsanapproachbasedonliberalisedenergymarketshasaimedtoimproveefficiencyofthesystems,inpartbyspreadingbothrewardsandrisksamongthefullrangeofactorsinvolved.Underthisstructure,theroleofgovernmentisremovedfromday-to-dayoperationswhilemaintainingresponsibilityforsettinguptheparametersthatincentiviseactorstooperateinasecure,cost-efficientmanner.Theoverarchingargumentisthatliberalisedpowersystemscanproducebetteroutcomesbecauseincentivesaremorealignedwiththeneedsofallstakeholders.Settingtherulesforwholesalemarketsisthemechanismbywhichgovernmentscreateincentivesforefficientoperationsinliberalisedpowersystems.Ifwelldesigned,themarketwill,inturn,offersufficientrevenuestocoverbothoperatingandcapitalcostsofvarioussystemfunctions,therebystimulatinginvestmentsneededtoprovideasecuresystematlowestcost.Intheliberalisationprocess,twomajorissueshavearisenincompetitivemarketsthat,leftunaddressed,couldresultininadequateinvestment.Thefirstistheneedtoensurethatmarketsfullyvaluealloftheservicesrequiredforsecuresystemoperation.Beyondthegenerationofelectricity,thisincludesancillaryservicesthatsupportitstransmissionanddistribution,suchasreservesthatallowthesystemtorespondtoadverseeventssuchasoutages.Thesecondistheneedtocreateframeworksthatallowthemarkettoevolveastechnologiesandoperationschange.Thissecondchallengeisparticularlyimportantconsideringtheverylargeinvestmentsneededforsomecapacity,forwhichcostsarenormallyrecoupedoverseveraldecadesofrevenue.Inthebidtodecarbonisetheelectricitysystem,pastoperationsandmarketpolicydecisioncancreatetheriskthatsomeassetsbecomeusedlessoraccruelowerrevenuethanthefinancialmodelonwhichoriginalinvestmentsweremade.Ineffect,theymaybecome“stranded”asthecontextandpolicychange.Inreality,marketinstrumentstoallocatetheserisksoverthelifeoftheinvestmentaremissingorincompleteinmanyplaces,bothgeographicallyandacrosstherangeoftechnologiesandservicesinvolvedinsystemsecurity.Forgovernments,thisraisesadifficultquestion.Shouldtheyletmarketforcesplayout,trustingthatopportunitytogeneratesufficientrevenuewillattracttheinvestmentsneeded,eveninlong-livedpowersectorassets?OrshouldtheyimplementmarketinstrumentstoencourageinvestmentsneededtoensuresecurityofsupplyisSteeringElectricityMarketsTowardsaRapidDecarbonisationChapter5–AdequacymechanismsPAGE77IEA.Allrightsreserved.maintained?Afinebalancemustbeachievedbetweenmarketinterventiontocorrectshortcomingsandtakingstepsthatcreatemarketdistortion.DrawbacksofcentralplanningHistorically,centrallyplannedpowersystemshavebeenabletosecureinvestmentsbasedoncalculationsoffuturedemandandstrategiestosupplyit–tothedegreethatover-investmentisacommonproblem.Inmanyjurisdictions,thisproblemarisesbecauseincentivessetoutbytheinstitutionalframeworkforthepowersectorgiveplannerstheresponsibilityofdecidinghowmuchfirmcapacityisneeded.Asplannersarealsoresponsibleforensuringthepowersectorsupportsthewell-beingofanycountryorregion,theytendtoerronthesideofcaution,overestimatingbothpeakdemandandthecapacityneededtominimisetheriskofoutages.RecentanalysisofintegratedresourceplanninginthewesternUnitedStatesshowsthattotalenergydemandisconsistentlyoverestimated,withonlyoneof12utilitieshavingforecastedlessloadthanactuallyoccurredoveraperiodof10years.ComparisonoftotalelectricityconsumptionforecastversusactualinwesternUnitedStatesintegratedutilities,2004-2015Note:LADWP=LosAngelesDepartmentofWaterandPower(California).NW=NorthWestern(Montana).PGE=PortlandGeneralElectric(Oregon).PugetSound=PugetSoundEnergy(Washington).NVPower=NevadaPower.SierraPacific=SierraPacificPower(Nevada).COPSC=ColoradoPublicServiceCorporation.PNM=PublicServiceCompanyofNewMexico.Source:IEAanalysisbasedonCarvalhoetal(2018),Longtermloadforecastingaccuracyinelectricutilityintegratedresourceplanning.SteeringElectricityMarketsTowardsaRapidDecarbonisationChapter5–AdequacymechanismsPAGE78IEA.Allrightsreserved.Centralplannersmustalsochooseamongdifferentsourcesofenergythatwillsupportefficientsupplyintheshorttermand10to15yearsintothefuture,knowingthereisariskthatvariablefactors(e.g.fuelpricesorinnovationsingeneratingtechnologies)canchangetheequationsuchthatverylargeinvestmentsbecomeuncompetitive.Thisrequires,unrealistically,thatplannershavegoodforesightofthefuturecostsoftechnologies(suchasVREandstorage)thatarerapidlyevolving.Abaseargumentforliberalisationisthatprivateactorsarebetterplacedtocollectsuchknowledgeanduseittocalculateinvestmentdecisions.Afundamentaldifferencebetweencentrallyplannedandliberalisedsystemsisthat,underthelatter,mostoftherisksarebornebyinvestorsratherthanbytaxpayersorratepayers,whodonotdecideoninvestmentsbutpaythembackovertimethroughenergytariffs.Shiftingriskstoinvestors:the“missingmoney”problemElectricitymarketsthathavedecidedtoshiftsomeoftheseriskstoprivateactorshavetypicallyusedenergypricingasanexplicitincentivetoattractnecessaryinvestments.Underliberalisation,however,evenifthewholesalemarketsufficientlyremuneratedthelocationalandspatialvalueofenergy,marginalcostpricingofgenerationalonecanbeinsufficientincentiveforsecureoperationandinvestment.Inshort,themarginalcostofgenerationdoesnotreflectthefulleconomicvalueofenergyandreservesattimesofsystemstressorthevalueoflostload(VoLL).Thisproblemisknownas“missingmoney”,referringtothegapbetweenpotentialremunerationandtheeconomicvalueofelectricitytoconsumers,leadingtounderinvestmentandalevelofreliabilitybelowthedesiredone.MarginalpricingandmissingmoneyIEA.Allrightsreserved.02004006008001000PriceQuantity(MW)RenewablesNuclearCoalGasDemandwithVoLLatUSD9000/MWhMarginalcostpricingMissingmoneySteeringElectricityMarketsTowardsaRapidDecarbonisationChapter5–AdequacymechanismsPAGE79IEA.Allrightsreserved.WaystoaddressthemissingmoneyproblemConceptually,policymakerscanapplythreedifferentapproachestotacklethemissingmoneyproblem,whichcanbeusedtogetherincomplementaryways:Energypriceadders,whichallowforhigherpriceswhenthesystemoperatorbecomesshortofthedesiredlevelofgenerationneededtosupportenergyandreserves.Capacityremunerationmechanisms,whichareapaymentgivenforgenerationordemand-sideresourcestobeavailablewhenneeded.Regulatedprocurement,inwhichtheamountand/orthepriceofcapacityaredeterminedbyaregulatorybody.EnergypriceaddersrewardavailabilityinrealtimeTosecureextrarevenuesneededtocoverthefixedcostsofthegenerationfleet,marketsareoftendesignedtoallowpricestoexceedvariablecostsduringcertainperiods(e.g.inpeakdemandormomentsofstresstothesystem).Essentially,such“energypriceadders”acknowledgethefactthat,tosecuresupplyinperiodsofdistress,additionalcapacityneedstobeavailable–andremuneratesownersoffortheirabilitytoprovidesuchassetsifneeded.ReliabilitypaymentsproveeffectiveinArgentinaTheliberalisedpowersysteminArgentinahastwomainpaymentschemes.Energypaymentsforsupplydeliveredproviderevenuecertaintyforinvestorswhilecapacitypaymentsremunerateforgeneratoravailabilityduringthemostcriticalhours.Inturn,thecapacitymechanismalsoincludestwotypesofpayments,oneforcapacityandoneforreservecapacity.Thefirstrewardsavailablecapacityonworkingdaysduringso-callednon-valleyhours(i.e.between6:00and23:00).ItsetatUSD10/MW/hour,correspondingroughlytotheannuitycostsofanopencyclegasturbine.Thispaymentisawardedtoboththenon-contractedcapacityofdispatchedgeneratorsandtogeneratorsscheduledintheday-aheadbutnotdispatched,basedontheirdeclaredavailability.Theschemealsoremuneratesnon-rotatingreservesbasedontheday’smarginalreserveprice.Torewardscarcity,Argentina’smarketdesignincludesasecondpaymentassociatedwiththelossofloadprobability.Thistop-uptothewholesalemarketpriceiscalculatedintwoways.TheISOusespowermarketsimulationstoidentifycriticalweeksforsupply,basedonprobabilitybandsforlossofload.Intheseweeks,theISOsetsaweeklypremiumforlossofloadrisk,calculatedasthedifferencebetweenthemarginalpricebetweenpeakhoursandtheassociatedVoLL.Generatorsoperatingduringcriticalhoursareeligibleforthesepayments.SteeringElectricityMarketsTowardsaRapidDecarbonisationChapter5–AdequacymechanismsPAGE80IEA.Allrightsreserved.Fortheremainingweeks,inwhichtheISOexpectstoserveallload,theoperatorcarriesoutprobabilisticsimulations(usingdailypeaks,load,generationandcongestionrisks)todetermineanaveragepremiumfortherestoftheseason’speakperiods.InspiredbytheoriginalmodeloftheelectricitymarketintheUnitedKingdom,thissystemhasallowedArgentinatomaintaininvestmentwithoutauctionsorlong-termcontracting–sincethebeginningofthemarketoperationin1992.AdequacypaymentsinAustraliaTheNationalElectricityMarket(NEM)inAustraliahasanadequacymechanismthatallowsgeneratorstoreceiverevenuesabovethevariablecostofenergythroughtwomeans:Generatorscanmakebidsabovetheirvariablecosts;intimesofpeakdemand,sincethereisnoavailablecapacitytoout-competethem,thesebidscanbeclearedinthemarket.Afixedatthepricecap,ofAUD15000/MWh,comesintoplaywhenthesystemoperatordoesnotprocureenoughreservestomaintainsystemsecurityincaseofacontingency.ThisapproximatestheVoLLincaseofdemandshedding.Toavoidexcessiveprofits,rulesoftheAustralianNEMforeseereducingthepricecaponceanetmarginofAUD224600/MWhasbeenreachedinagivenyear.Whenthisthresholdisreachedformorethanaweek,orabout7.50fullhoursofscarcitypricing,thismechanismrequiresthesystemoperatortoenteraschemeofadministeredprices.ScarcityepisodesinAustraliaIEA.Allrightsreserved.Source:IEAanalysisbasedonAEMO.0246810121416182020172018201920202021Halfhourintervalsabove5000AUD/MWhVictoriaSouthAustraliaNewSouthWalesQueenslandTasmaniaSteeringElectricityMarketsTowardsaRapidDecarbonisationChapter5–AdequacymechanismsPAGE81IEA.Allrightsreserved.EnergyadderusebytheElectricReliabilityCouncilofTexas(ERCOT)IntheERCOTmarket,whichcomprisesmostoftheTexaspowersystem,whenthesystembecomesshortofreserves,themarketincorporatesenergyadderstopricesthatreflecttheVoLL.Asacomplement,ERCOTimplementedanoperatingreservesdemandcurvethatpermitspricestoexceedthevariablecostofthemarginalsource;thecompensationlevelincreaseswiththelikelihoodofalostloadeventwhenreservesareinshortsupply.Thismechanismemulateshowmarketsofotherproductsreacttoscarcityinreality:i.e.thelackofspareproductioncapacitytriggersanincreaseinpriceasdemandincreases.OperatingreservesdemandcurveinERCOTIEA.Allrightsreserved.Source:IEAanalysisbasedfromERCOT,(2022),Operatingreservesdemandcurve.Inshort,marketswithenergypriceaddersusehighpricestorewardavailabilityduringperiodsofdistress.Theperiodinwhichthesepricesapplydiffersinthatitcanbeforecasted(asinArgentina)oroccurinrealtime(asinAustraliaandTexas).Inthelattercase,variousmarketparticipantshelpthesystemoperatormaintainelectricitysecurityaccordingtotheirowninterests:inthecaseofgenerators,itisintheirinteresttobeavailable;inthecaseofretailers,toactivatethereductionofflexibledemand.Capacityremunerationmechanisms(CRMs)Tosecureenoughinvestmentstosatisfypeakdemand,manypowersystemshaveoptedtousecapacityremunerationschemes(CRMs)todirectlyrewardthecapacityoftechnologies.ExperienceintheapplicationofCRMsisextensive,withmanydesignshavingbeentestedaroundtheworld.010002000300040005000600005001000150020002500300035004000450050005500600065007000USD/MWhMWSteeringElectricityMarketsTowardsaRapidDecarbonisationChapter5–AdequacymechanismsPAGE82IEA.Allrightsreserved.Inmanymarkets,capacitymarketscomplementtheincentivesprovidedbyenergyadders.Inanycommoditymarket,itisexpectedthattheper-unitpricewill,overtime,provideasufficientsignaltorepaytheinvestmentneededtosatisfydemand.Addingacapacitypaymentimpliespayingforaninputthatisseparatefromtheenergyandancillaryservicesneededtobalancedemandandsupply.Inmanymarkets,legitimatereasonsjustifythepotentialtoearnrevenuebyprovidingthiscapacity.CRMsplaythisroleinenergymarkets(goingbeyondenergyadderstofulfiladifferentrole).ConservativereliabilitystandardsInsharpcontrasttomostmarkets,electricitydemanddoesnotrepresentthepreferenceofconsumersinrealtime.Thisfeaturemakeselectricitydemandvery“inelastic”andnotreflectiveoftherealvalueoftheenergyconsumed.Asasubstitute,regulatorssetreliabilitystandardsbaseduponthenumberofhoursoramountof“unservedenergy”thatareacceptableoveragivenperiod.Traditionally,electricitysystemshavesetreliabilitystandardsbasedonengineeringcriteria,suchasa“1outageeventin10years”.Thisismuchmoreconservativethanstandardsbasedoneconomiccriteria(e.g.threeoutagehoursperyear)ortheamountofunservedenergy.Insuchsystems,policymakershavetheresponsibilityofassessingthetoleranceofpopulationstosupplyinterruptions,whichmayjustifyconservativereliabilitystandards.However,conservativereliabilitystandardscouldrequirelargeradditionalamountsoffirmcapacity–beyondwhatcanbesustainedbyenergyonlymarkets.Inthiscase,CRMsprovideamechanismtosustainthereservemarginsrequiredtocomplywithsuchreliabilitystandards.LowpricecapsIncaseswhereelectricitysupplyisconcentratedacrossasmallnumberoffirms,thelackofdemandelasticityinrealtimeexposesthemarkettomanipulation.Pricecaps,whichcanchangetheshapeofcost-basedbidsandpricing,areregulatorymeasurestopreventsuchabuse.Thedownsideisthatalowpricecapmightprecludethemarginalgeneratorfromrecoveringitsfixedcoststhroughtheenergymarket.Inthiscase,thecapacitymarketservesasamandated,centralisedpurchaseofanoptiontobuyenergyatthepricecap.RegulatoryuncertaintyLackofclarityonpolicyandregulationregardingfuturepolicesofthepowersector,suchasthespeedandmannerofdecarbonisationofthepowersectororthefutureofthenuclearorcoalfleetsinmanymarketsmayincreasetheperceptionofriskfornewandexistingassets.Wheresignificant,unforeseenSteeringElectricityMarketsTowardsaRapidDecarbonisationChapter5–AdequacymechanismsPAGE83IEA.Allrightsreserved.governmentinterventionscoulderodetheprofitabilityofnewinvestments,theconceptofaminimumrevenuesourcecouldreducetheperceivedrisk.Thisisparticularlyimportantfordispatchablesources.OptimisingCRMsfortheenergytransitionAsaconcept,CRMsarerelativelysimple;inpractice,theyhavealwaysbeencomplextoimplement,particularlyastheyaresupposedtocompensateforthemissingmoney.Theenergytransitioncreatesadditionalpressuretoreformthesemechanismstomakethemfitforthepurposeofensuringsecurityofsupplyatthelowestcost.Eveninthecontextofliberalisation,manycapacitymarketsfacesimilarproblemsascentralplanninginthatplanners(oftenthesystemoperators)forecastmorecapacitythanisrequiredtosatisfysystemneeds.ManyCRMsprovideincentivestooverestimatedemandorunderestimatethecontributiontoadequacyfromresourcesthatarehardertomeasure,suchasdemand-sideresponse,energystorageorVRE.CRMs,atleasthistorically,oftenpaidforcapacity-basedonameasureofexpectedavailability;inturn,penaltiesforlackofperformanceduringcriticalperiodswerelowornon-existent.Thisprovidesinsufficientincentiveforgeneratorstoparticipateintimesofsystemstress.WithmoreVREandanincreasingnumberofextremeweatherevents,thepredictabilityofcriticalperiodsoftheyearislikelytodecline.Systemswillneedtoevolveanddevelopnewincentivestoguaranteethattheproduct–i.e.securityofsupply–isdeliveredbytheresourcesbeingpaidtoprovideit.CRMswereconceivedatatimewhenmosttechnologieswere“dispatchable”,includinghydro,geothermal,nuclearorfossilfuel-basedthermalplants.Intoday’scontext,manyofthesemechanismsareill-suitedtoproperlyoperateandremuneratethecontributiontoadequacysources(e.g.demand-sideresponseandVREs)andenergy-constrainedresourceswithshortduration(e.g.batteries).ThisrangeoffactorsmakestheredesignofCRMsoneofthemostvitaltopicsofreformformatureelectricitymarkets.DesigningadequacymechanismsforthefutureYearsoftrialanderrorintestingdifferentmechanismstostimulateinvestmentinandappropriatecompensationofCRMsforthepowersectorhavecreatedawealthofexperiences–andgreaterknowledgeofthecharacteristicsneeded.Throughdifferentdesigns,policymakersvaryinwhethertheyassigncertaindecisionstoplannersorleavethemtomarketparticipants,asshowninasummarySteeringElectricityMarketsTowardsaRapidDecarbonisationChapter5–AdequacymechanismsPAGE84IEA.Allrightsreserved.ofdiverseadequacyremunerationframeworks.Thefollowingtableprovidesanoverviewofdifferentdecisionsthataretakenbyplannersorregulatorswithinvariousadequacyregimes.CharacteristicsofadequacymechanismsAdministrative/regulatorydecisionCentrallyplannedEnergy+centralisedcapacitymarketEnergy+decentralisedcapacitymarketEnergyonlyReliabilitystandard●●●●Energypricesinperiodsofstress●●●Levelofoperatingreserves●●●●Peakdemandforecast●●Definingtechnologiescapableofdelivertheproduct●●●Productdefinition●●●Amountofcapacitytobeprocured/Capacitydemandcurve●●Technology/fuel●Location●Size●IEA.Allrightsreserved.Source:IEA(2021),SecureEnergyTransitionsinthePowerSector.Availabilityshouldbefocusedoncriticalperiods,notpeakdemandForplanningpurposes,peakdemandisanormalmetricusedtodetermineadequatecapacity.Inpractice,theperiodswhencontingenciesarisedonotnecessarilycoincidewithpeakdemand.InMexico,thecapacitymarketdefinestheproductbasedonhoursinwhichsystemreservesarelowest.Infact,whilepeakdemandtypicallyoccursduringsummerpeaks,halfofthecriticalperiodsoccurduringthenight–notcoincidingwiththehourofpeakdemand.Astronglogicexists,insuchcases,forredefiningcapacityproductstobetterreflectactualscarcityperiodsinsystems.SteeringElectricityMarketsTowardsaRapidDecarbonisationChapter5–AdequacymechanismsPAGE85IEA.Allrightsreserved.CriticalhoursofthedayinMexicoIEA.Allrightsreserved.Source:IEAanalysisbasedondatafromCENACE(2022),100horascríticas.DecarbonisationboostsneedfortechnologyneutralityTechnologicalinnovationandchangesinhowthepowersectorfunctionshaveledtoamuchrichersetofcapacitysourceswithverydifferentcapabilities.Definingexantethetechnologiesthatcanorcannotprovideacapacityproductinevitablyleadstomisrepresentationofthesupplyanddemandoftheproduct.AcrosstheEuropeanpowerspotexchange(EPEX),supplierscanparticipateinauctionsormakebilateraltradestoobtaincertificatesatnumerousintervals,bothbeforeandduringthedeliveryyear.Francehasdevelopedamechanismthattapsintothisopportunity.TheFrenchsystemoperator,RTE,certifiestherequirementsforobligatedparties(suppliers)andcapacitiesforoperatorsbyinformingthesepartiesofselectedperformancedates(calledPP1periods).Thisisdoneonedayinadvance,upto15daysperyearduringthemonthsofNovemberthroughMarch.Onthesedays,between07:00and15:00andfrom18:00to20:00,RTEcalculatestheconsumptionoftheloadassignedtoeachsupplierandtheoutputofoperators.Attheendofthedeliveryyear,thesuppliermustholdcertificatesintheamountoftheirconsumptionduringthePP1periods.Ifshortofcertificates,thesupplierpaysapenaltyrate.France’smechanismprovidesaneconomicincentiveforsupplierstotailorofferstocustomersthatreflecttheirconsumptionduringPP1periods,ineffectdrivingdemandresponseparticipation.Italsopromptscapacityoperatorstoavoidoutagesduringtimesofexpectedstressasameanstoobtaincertificatesthatcanbesoldtosuppliers.OperatorsofVREreceivecertificatesthatmatchtheiractualcontributiontosecurityofsupply,insteadofanexantecalculatedcontribution.0510152025301415161718192021222324FrequencyMinimumreserveMaxdemandSteeringElectricityMarketsTowardsaRapidDecarbonisationChapter5–AdequacymechanismsPAGE86IEA.Allrightsreserved.ClassratingsToassesstheabilityofresourcestodeliverduringtimesofexpectedshortage,systemoperatorsalsoneedtodeterminecapacityratingsforresources.Thesecanbeassessedbytype(e.g.gas,coal,windandsolar)and/orbylocation.Thetyperatingisparticularlyimportantforintermittentresources(e.g.windandsolar)andenergy-limitedresources(e.g.batteries)astherating,andasaresult,thepotentialpaymentcanvarydramaticallyacrossdifferentassessmentmethods.Thelocationratingisespeciallycrucialtoassessinlarge,geographicallydiversesystems.AsPJMisthelargestpowermarketintheUnitedStatesandoneofthelargestinterconnectionsintheworld,thesefactorsleadtoverydifferentconditionsofsupplyanddemandwithinitsfootprint.In2021,PJMimplementedanaccreditationprocessusingtheeffectiveload-carryingcapability(ELCC)method,whichmapsfutureexpectedoutputsofaresourceagainstexpectedloadshapes.Thecapacityratingisaresultofthismodellingexerciseandequalsthequantityofloadestimatedtobeabletobeservedwhenaddinganewresourceofthattype.Effectiveload-carryingcapabilityeffectontyperating,PJM(2023-2024)ResourceStatusquorating(%)Newrating(%)ChangeOnshorewind14.713-1.7Solarfixed3829-9Solartracking6054-64-hrstorage4079+398-hrstorage8095+15Hydrointermittent10044-56Landfillgas10062-38IEA.Allrightsreserved.Source:IEAanalysisbasedonPJM(2021),Howeffectiveload-carryingcapability(“ELCC”)accreditationworks.PJMadjuststhesevaluesannually,basedonchangestotheresourcemixandloadshape.Thehoursinwhichshortagesareexpectedtooccur(loadshape),forexample,aremostlikelynearoraftersunsetorinwinter–i.e.whensolarcannotproduceathigh-capacityfactors.Thus,withgreaterpenetration,solarfixedbecomeslessabletosupplyduringtimesofdistressanditscapacityratingisreduced.Currentestimatessuggestitwillbeloweredfrom29%in2023to18%in2028.Thisapproachhassignificantlyshiftedthecapacityratingsofseveralgeneratingclasses.Thesharpestdropwasinintermittenthydro(56%)andlandfillgas(38%),SteeringElectricityMarketsTowardsaRapidDecarbonisationChapter5–AdequacymechanismsPAGE87IEA.Allrightsreserved.withlessseveredeclinesinsolarfixed(9%)andtracking(6%).Incontrast,storageratingsincreasedsubstantiallyforbothpumpedhydroandbattery,from40to79%for4-hourdurationand80to95%for8-hourduration.LocationalpricesInadditionaltotheratingofaparticularresourceataparticularlocation,thepriceofaresourceshouldalsovaryaccordingtomarketconditions.PJMusestwoadditionalmechanisms(beyondnodalpricesinthespotmarket)toaccountforthisgeographicaldiversityandprovideincentiveforgeneratorstolocatewhereneeded:Capacityzones:PJMisdividedintoupto19zonesordeliveryareas,dependingontransmissioncapabilitiesbetweendifferentregions.Capacitypricesvary,dependingonthesupply-demandbalanceofeachregion.Averagepriceadjustment:thelevelofthecapacitypaymentisdeterminedbyauction,afterwhichtheymaybeadjustedbysubtractingtheaverageenergyrentsofthewholesalemarket.Thismeansthatplantslocatedinzoneswithhighpriceswillearnhigherrevenuesthanthoseinzoneswithlowprices.ThispricesignalwillbecomemorerelevantasthemarketshareofVREincreases.CapacitypricesbyzoneinthePJMfor2022/2023deliveryyear(USD/MWperday)IEA.Allrightsreserved.Note:ComEd=CommonwealthEdison.DEOK&K=DukeEnergyOhioandKentucky.RTO=PJMMarket(excludingthedeliveryareasmentioned).BGE=BaltimoreGasandElectric.EMAAC=EasternMid-AtlanticRegion.MAAC=Mid-AtlanticRegion.Source:PJM.SteeringElectricityMarketsTowardsaRapidDecarbonisationChapter5–AdequacymechanismsPAGE88IEA.Allrightsreserved.RegulatedprocurementofpeakcapacityGenerally,electricitymarketswereintroducedwiththeprimaryaimofminimisingthecostsofeverydayoperations.Theunderlyingmechanismistoallowdiverseentities–mainlygeneratorsandretailers–toexchangeenergyproducedthroughassetstheyownorhavecontractedinadvance.Inelectricitymarketsinwhich“load-servingentities”procurecapacity,itisoftenutilitiesinchargeofdistributionandretailactivitiesthatmustcomplywitharegulatoryobligationtocontract–inadvance–sufficientcapacityfortheirdemandforecast.AgoodexampleofthistypeofadequacymechanismisappliedinthestateofCalifornia,wheretheCPUCimposestheobligationtotheload-servingentities,whichmustcontractinadvancewithdifferentgenerators.FinalrecommendationsToensurethatasufficientlevelofresourcesneededtoensuresecurepowersystemscanrecoverfixedcostsandencouragefurtherinvestmentsinlinewithdecarbonisationpolicyobjectives,policymakersshould:Usepriceaddersinwholesalemarketstocreateincentivesforcapacitytobeavailableintimesofdistress.Createstrongpricesignalsintheenergymarketbyembeddingthecostofreserveswithinthemarketprice.Strongpricesignalsprovideincentivesforallresources-bothonthedemandandsupply-side-tocontributetosystemsecurityintimesofdistress,andsteersinvestmentstowardsthetechnologiesandlocationsprovidingthehighestvaluetothesystem.SupplementenergymarketpricesignalswithCRMstoachievethedesiredlevelofreliability:UseCRMstocomplementthepricesignalsgivenbytheenergymarket.Thereisnotaneedtochoosebetweenthem,inparticularifmechanismstoavoiddoublepaymentsareimplemented.Definecapacitytocompensateresourcesfortheircontributiontosystemadequacy:DesignCRMsinatechnologicalneutralmanner,suchthatthecontributionofalltechnologiestowardsasecurepowersystem,includingVRE,batterystorage,anddemand-sideresources,isproperlyacknowledged.SteeringElectricityMarketsTowardsaRapidDecarbonisationChapter6–RetailmarketregulationPAGE89IEA.Allrightsreserved.Chapter6.RetailmarketregulationProtectingconsumerswhileencouraginginnovationInliberalisedelectricitysystems,thewaysinwhichwholesaleandretailmarketsinteractultimatelyhasimpactsonfinalconsumers,whetherlarge,energy-intenseindustries,mid-sizecompaniesorindividualhouseholds.Behindtheactualtrading,thepolicyinstrumentsthatgovernmentsusetoallocaterisksandrewardsplayacrucialroleindeterminingwhetherthebenefitsofliberalisedwholesalemarketsreachfinalconsumersorthescaletipsmoretowardsthecostslinkedtoriskbecominganextraburden.Forendconsumers,electricityislikemanyothercommoditiesinthattheydonotparticipatedirectlyinwholesalemarketsbutengagewithretailers–i.e.intermediariesthatpurchasetheproduct(inthiscase,power)andre-sellit.Ideally,thesaleprice(ortariff)allowscustomerstosatisfytheirdemandforelectricity,whilealsoprovidingasufficientprofitmargintotheretailer.Inthemarketliberalisationprocess,manypoliciestransferredtheroleofmanagingandallocatingriskonbehalfofcustomerstoretailers.Assuch,retailersserveacriticalfunctioninthepowersector.Thecleanenergytransitionischangingthetypesofrisksretailersface,howtheymustbemanagedandultimately,whatpricestheyneedtocharge.Bringingmorevariablerenewables(VREs)andnon-dispatchableresourcesontothegridmeansthatsomeofthenewresourceislocatedBTM–i.e.awayfromthepointwhereretailersareabletotrackcustomerconsumption.Recentspikesinelectricitypriceshighlighthowtheymuchtheyarelinkedtothepriceofnaturalgas,andhowthecurrentsystemleavesbothretailersandconsumersexposedtopricevolatilityonglobalmarkets.Theenergycrisisarisinginlate2021wasexacerbatedbytheseanFederation’s(“Russia”hereafter)invasionofUkraineinearly2022.Bothbroughtmorepublicattentiontohowthemarketfunctions,includingitsstrengthsandweakpoints.Theneedtore-examineexistingretailregulationiscrucialontwolevels.Becauseelectricityaccessisanecessityofmodernlife,policiesshouldprotectconsumerswhowouldliketoavoidexcessexposuretocomplicatedmarketrisks.Aswell,policiesshouldalsoencouragesystem-friendlybehavioursthatengagecustomersinwaysthatcandrasticallylowertheirbills.Thepotentialofdigitalisationtoempowercustomerstodirectlyparticipateinbalancingthegrid(e.g.throughsmartSteeringElectricityMarketsTowardsaRapidDecarbonisationChapter6–RetailmarketregulationPAGE90IEA.Allrightsreserved.meteringandhomedevicessuchaselectricvehicle[EV]charging),forexample,ispromotedasopeningupnewopportunitiesbutoftenmetwithscepticism.Inturn,inlightofthelargenumberofretailersthatwereforcedintobankruptcybyrecentevents,regulationalsoneedstoconsiderhowtosupportacompetitiveretailmarketwhilenotburdeningthetaxpayers.Thedelicateandcomplexbalanceacrosstheseareasisthefocusofthischapter.WhyelectricityisuniqueFormostgoods,thecombinationofthechoiceofmultiplesuppliersandwell-informedconsumersissufficienttoensureacompetitivemarketoutcome–i.e.oneinwhichconsumerscanselectaproductorservicethatmeetstheirneeds(orpreferences)andfitstheirbudgetswhileretailersearnsufficientprofittokeepoperating.Whilebothpartiesmaymaketrade-offsintermsofwhattheyofferorbuyatwhatprice,apolicyroleexistsinsettingbasicstandardsforquality.Inthecaseofelectricity,severalfactorscomplicatetheprocessofestablishingclearregulationstoensureconsumershaveaccesstochoicesthatfittheirpreferenceswhileretailerscanmaintainviablebusinesses:Storageisexpensive:untilrecently,electricitystoragewaslimitedmostlytohydropowerreservoirs.Asaresult,retailershadtocontractwithsupplierssuchthatpowerwouldbeavailableatexactlythemomentofcustomerdemand.Whilethereal-timenatureofthesystemstillexists,technologiesarebeingdevelopedthatprovidestoragecapacitywhichcan“absorb”excesselectricityandreleaseitondemand,loweringtheriskofasystemimbalance.Whilepricesaredeclining,storageisarelativelycostlycommoditythatretailersneedtoreflectinthepricetheychargetoconsumers.Volatility:energypricesvaryinrelationtoexpecteddemandandavailablesupply.Inelectricitymarkets,wholesalepricesmainlyreflectthecostofthemostexpensiveunitneededtoinstantaneouslymatchgriddemand.Thispriceoffuelandtheefficiencyoftheprice-settingunitcanvarywidelyintheshortrun,asfastasfiveto15minutes,andevenfurtherinthelongterm,drivinglargechangesinthemarketprice.Continuedrelianceongeopoliticallystrategicnaturalgasastheprice-settingfuelinmanymarketscouldleadtoevenmorepronouncedelectricitypricevolatilityinthefuture.Lackofreal-timeresponse:incontrasttomostmarkets,wherepeopletakeanimmediatedecisiontobuyornotdependingontheproductofferanditsprice,therearefewpracticalwaysforconsumerstoreactinrealtimetowholesaleelectricitymarketprices.Typically,theyareunawareofwholesalepricesandonlypayretailbillsdaysorweeksafterconsumingtheproduct.Thiscreatessituationsinwhichconsumersmayfindtheyconsumedelectricityattimeswhenthecosttodelivertheservicemayhaveexceededthevaluetheyfeeltheyderived.Digitalisation,throughdevicessuchassmartmeters,theoreticallyincreasetheSteeringElectricityMarketsTowardsaRapidDecarbonisationChapter6–RetailmarketregulationPAGE91IEA.Allrightsreserved.abilityofconsumerstorespondtoelectricitypricesinrealtime.Sometechnologieswillautomatethisfunctioninwaysthatareimperceptibletocustomers(e.g.smartchargingofEVsorprogrammingthermostatsanddishwasherstorunwhenpricesarelowest).Complexmarketdynamics:theabovecharacteristicsofelectricitycreatemultiplerisksthatretailersneedtohedgeagainst,whichrequiresacertainlevelofknowledgeandskill.Withthesefactorsinmind,policymakersandenergyregulatorsshouldconstantlyassesshowwellcurrentretailmarketdesignrespondstoconsumerpreferences,includingtheiraversiontoriskandwillingnesstoacceptpricevolatility,whileeffectivelyusingpricesignalsatthemargintoencouragebehavioursthatbenefitthesystem.Time-varyingratescanlowerbillsandincreasesystemefficiencyThereiscleareconomicrationalebehindtime-varyingrates,whichoccurinmanydifferentforms1andhavebeenimplementedinjurisdictionsincludingFrance,theUnitedKingdom,Italy,Spain,Ontario,Arizona,CaliforniaandMichigan.Studiesshowthatthesemultiplepricingoptions,whichinsomewayraisethepriceofpeakenergyrelativetootherperiods,canclearlyreducepeakloads–andoverallsystemcosts,asaresult.Theimpacthasbeenshowntorelatetotheratiobetweenpeakandoff-peakprice,withasmuchasa25%expectedreductioninpeakdemandwhenpeakpricesare10timeshigherthanoff-peak.1Theseincludedemandcharges,timeofuserates,criticalpeakpricing,variablepeakpricingandreal-timepricing.SteeringElectricityMarketsTowardsaRapidDecarbonisationChapter6–RetailmarketregulationPAGE92IEA.Allrightsreserved.Priceresponsivenessoftime-varyingrateswithandwithoutenablingtechnologyIEA.Allrightsreserved.Source:IEAanalysisbasedonFaruquiSergiciandWarner(2020),Arcturus2.0:Ameta-analysisoftimevaryingratesforelectricity.Capacitysubscriptionsareanotherinnovativewaytointroducereal-timepriceresponsivenesswhileprotectingconsumers.TheyarecurrentlyunderconsiderationinNorway.Undersuchschemes,duringhighdemandperiods,customerspayaregularenergychargeforconsumptionuptovolumedefinedintheirsubscription;anyadditionalconsumptionischargedatamuchhigherrate.Thiscanbeparticularlyhelpfulduringemergencysituationswhenrationingofelectricitymightberequired.Itensuresthatallcustomerscandrawuponabasiclevelofserviceforcriticalloadsbutaddsapricepenaltyforthosewhoover-consumeduringatimeofsystemstress.ButretailmarketsshouldalsoprotectconsumersRetailchoiceAllowingconsumerstochoosetheirelectricitysupplierisafundamentalelementofliberalisedelectricitymarkets.Inmostmarkets,largeconsumerstypicallybenefitfromhavingaccesstotailoredratesthatreflectthevolumeandSteeringElectricityMarketsTowardsaRapidDecarbonisationChapter6–RetailmarketregulationPAGE93IEA.Allrightsreserved.characteristicsoftheirdemand.ThismightincludeTOUandseasonalratesadaptedtotheirconsumptionprofile,reducedpricevariabilityandconsiderationoftheirdemandresponsecapabilities.Tokeepthemarketcompetitiveandfair,variousprice(e.g.pricecaps)andserviceregulationsestablishparameterswithinwhichsupplierscanmaketheseoffers.Theefficacyofrelyingsolelyonretailchoicetoenablesmallconsumerstobenefitfromcompetitionislessclear.Althoughtheentranceofmoresuppliershasbeenimplementedinmanyjurisdictions;retailchoicehasoftenpromptedslowratesofsupplierswitching.Althoughthisisnotbyitselfasignoflackofcompetition,itcantakesometimesyearsforentrantretailerstocapturesignificantmarketsharesfromincumbents.BasicserviceordefaultretailersWithinmanyretailmarkets,thesub-groupofbasicservice(ordefault)retailersplaysaspecificrole.Ratherthanbeingdeterminedthroughwholesalemarkets,theirrates(prices)arefixedbyregulators.Thisreflects,inpart,thattheyareusuallyestablishedtosupplycertainclassesofconsumers(e.g.thosebelowacertainconsumptionthreshold).Regulatorsneedtobedeeplyengagedtosetappropriateratesandaddresskeyquestions:Towhatdegreeshouldbasicserviceretailersbeexposedtospotprices?Whatcontractdurationisneededtoprotectthebasicserviceretailerfromspotprices?Shouldthebasicserviceretailerhedgeonfuelslinkedtoelectricityspotprices?Whathappensiflargegapsarise(eitherinquantityorvalue)betweendemandandthehedgingcontracts?Inpractice,manyjurisdictionshavehybridretailelectricitysystemswitharangeofregulations.Largeconsumers,forinstance,maybeobligedtobuyfromacompetitiveretailerwhilemid-sizedconsumershavetheoptiontochoosetheirretailer–butarenotobligedto.Often,householdsandsmallbusinesseshavenochoiceandareobligatedtotakesupplyfromaregulatedretailer.Forcustomersthatdonotchooseathird-partyretailsupplier,thestateofNewJersey(UnitedStates)offersbasicgenerationservicethroughaninnovativeauctioninwhichretailerscompeteonpricetoservethosecustomers.Thisservicerequirespotentialsupplierstoofferafixedrateforthegenerationportion(includingenergy,capacityandancillaryservices)ofthecustomer’selectricitytariff.Inthe2023deliveryperiod,theNewJerseyStateBoardofUtilitiesoffered54equaltranchesofresidentialloadacrossthefourelectricitydeliverycompanies.Theauctionledto10differentsupplierswinningtranches.Inthisway,theauctionSteeringElectricityMarketsTowardsaRapidDecarbonisationChapter6–RetailmarketregulationPAGE94IEA.Allrightsreserved.allowssmallcustomerstobenefitfromcompetitionwhilemaintainingthepricecertaintyoffixedrates.Todate,thelevelofuptakeinthird-partysuppliersvarieswidelybycustomertype:only8%ofresidentialloadhaschosenatarifffromathird-partysupplier,comparedwith46%ofsmalland85%oflargecommercialandindustrialcustomers.Recenteventspromptare-thinkofretailmarketpoliciesinmanycountriesIn2021,thepriceofnaturalgasinEurope(includingembeddedemissionscosts)rosetosixtimeswhatitwasbeforetheCOVID-19pandemicwreakedhavoconeconomiesandenergymarkets.Withgas-firedunitsbeingessentialforbalancingelectricitysystemsacrossthecontinent–andgenerallyplayingtheroleoftheprice-settingproducer–risinggaspricestriggeredhigherwholesaleelectricityprices(evenincountrieswheregasisonlyaminorshareoftheelectricitymix).Inthefourthquarter(Q4)of2021,wholesaleelectricitypricesinFrance,Germany,SpainandtheUnitedKingdomexceededQ4averagesover2016-2020periodbythreetomorethanfourtimes.Suchincreasesinfuelandproductioncostshavetobecoveredacrossthemarketsystem,typicallybyincreasingpricestoretailers–whothenpassthemontocustomers–orbybuildingthemintochargestotaxpayers.Intherecentenergycrisis,muchoftheincreasehasbeenpassedontofinalconsumers.FromDecember2020toDecember2021,electricitypriceschargedtoEuropeanhouseholdsroseby31%onaverage.Theextenttowhichtheseincreaseshaveimmediatelyaffectedhouseholdsreflectshowexistingregulationsgovernretailpricesettingandwhetherandhowgovernmentsintervenedtomanagethecrisis.HouseholdelectricitypricesinFrance,wherenuclearsuppliesroughly70%ofgeneration,rosebylessthan10%.InBelgium,GreeceandtheUnitedKingdom,householdpricesincreasedbyover75%.IntheNetherlands,householdsbillssurgedby127%.Asthesituationcontinuestoevolveinmid-2022(attimeofpublication),itbringstotheforemanychallengesforregulatorsnotonlyacrossEuropebutglobally.Aswellassomevaluablelessons.PrudentialregulationforretailersThecurrentcrisishasalsohitretailershard.InGermanyalone,betweenthesummerof2021and21January2022,38retailersdeclaredbankruptcy.Sincethestartof2021,30suppliersintheUnitedKingdomhavedonethesame.Whileseeingfirmsthatcannotcompete(i.e.delivergoodsorservicesinacost-efficientSteeringElectricityMarketsTowardsaRapidDecarbonisationChapter6–RetailmarketregulationPAGE95IEA.Allrightsreserved.manner)exitamarketisafeatureofeffectivecompetition,suchalargewaveoffailuresintheelectricitysuppliermarketsuggestsimperfectionsintheregulatoryframework.Lackofalegalframeworktoensurethefinancialsafetyandstabilityofretailers(knownasaprudentialregulation)hascreatedacontextinwhichretailerscanenticeconsumerswithlowpriceoffersthatarenotbackedbysoundriskmanagementpractices.Whenretailersfailed–inthemiddleofthecrisis–theirconsumerswerepassedontoadefaultretailer;withlittleornochoiceintheircontracts,theseconsumerslosttheirabilitytoparticipateinthemarketandwereusuallygivennocompensation.Thissetofcircumstancesisasignificantconsumerprotectionissue.WhenextremepricesgetpassedontoconsumerbillsInFebruary2021,arecord-breakingwinterstormhitTexasandotherstatesinthemid-westandsouthernUnitedStates.Historicallycoldtemperaturesandhighwindshoveredoverseveralstatesforfivedaysstraight.Acrossthenaturalgasandpowerinfrastructures,energydemandspikedtothedegreethatitcausedoutages,hamperingsupplyinasignificantportionofthesystem.InTexas,morethanfivemillionpeople(about30%ofsystemload)wereleftwithoutpowerforuptofourdays.TheunmetelectricityconsumptioncauseddirectcosttoconsumersofaroundUSDfourbillionandtotaleconomiccostofatleastUSD100billion.Tragically,thecombinationofthestormandtheenergycrisishavebeenlinkedtoanestimated700deaths.Thephysicalshockacrossthesesystemsrevealedseveralweaknessesintheregulationofretailmarkets.Asthestormwasapproaching,theERCOT,themarketoperator)anticipatedthesupplyshortageandcalledoncustomerstoconserveenergy(reduceenergydemand).Thecallwasonlyvoluntary,notpartaformaldemandresponseprogrammethatwouldinvolvepaymentstocompensatecustomersforthevaluetothesystemthatlowerdemandwouldrepresent.Asshortagesstartedtooccurandgrowdeeper,ERCOTwasunabletomaintainservicetocriticalloads(suchashospitals)onsomefeederswithoutentirelycuttingoffservicetootherfeeders.Inturn,ithadnotincludedsomenaturalgasfacilitiesascriticalloads,whichleadtotheirelectricityservicebeingturnedoff,furtherreducingtheoverallcapacitytoproduceelectricity.Adominoeffectensued,leavinguptofivemillioncustomerswithoutheatand/orelectricity.Lackinganyconcreteincentive,post-eventanalysisfoundthereductionindemandtobenegligible.Inparallel,theimbalancebetweendemandandavailablesupplycausedtheTexaswholesalemarkettohitthepricecapofUSD9000/MWh,whichistypicallySteeringElectricityMarketsTowardsaRapidDecarbonisationChapter6–RetailmarketregulationPAGE96IEA.Allrightsreserved.reachedforonlyafewminutesperyear.ERCOTmaintainedthatpriceforfourdays,eventhoughthepricingmodelwasoutputtinglowerprices.WhileTexashasretailchoice,whichallowsmanydifferenttypesofofferswithvariableexposuretoprices,inthisextremeexample,someconsumersendeduppayingaheavycostfortheirchoice.About30000customersweresuppliedbyGriddyEnergy,whichofferedatariffconsistingentirelyofthewholesalespotprice(plusafixedmonthlyfeeofaroundUSD10).Whenbillsarrivedafterthestorm,theyreflectedthepricecap(USD9000/MWh)havingbeeninplaceforuptofourdays–andobligedconsumerstopaybillsthatwerebetween150and300timestheaveragerate.FinalrecommendationsRetailmarketdesignshouldfulfilthedualroleofencouragingmoreefficientuseofsystemassetswhilealsoprotectingconsumers–particularlythemostvulnerable–fromexposuretorisk.Variousinstrumentscanbeappliedunderthreemainmeasures:Developinnovativetariffstoencouragedemand-sideparticipation:significantefficienciescanbegainedbycreatingtariffs(e.g.capacitysubscriptions)thatinvolvesomeexposuretospotmarketpricesbutdonotcreateexcessiverisk.Prudentialregulationshouldbestablishedtoprotectconsumers:Regulationshouldguaranteethatretailersareabletofulfiltheircontractswithfinalconsumers,inparticularwhenthetariffismeanttoprovidesomeratestability.Enabletheuseoftechnologytomanageconsumption:policymakersshouldallocatetheresponsibilitytoeducatecustomersonwaystousesmarttechnologiestomanagetheirconsumptionandbetransparentregardingtheuseoftechnologies(e.g.grid-friendlyEVchargingandsmartactivationofappliances)thatoperateinwaysthatareimperceptibletoconsumers.Protectbasicservice:consumerswho“opt-out”ofthechoicetoactivelymanagetheirconsumptionshouldbeabletochoosefixedtariffsfromfinanciallystablesuppliers.Thiscanbecombinedwithamechanismthatintroducessomeformofcompetitiontoservesmallcustomersatlowestcost.SteeringElectricityMarketsTowardsaRapidDecarbonisationChapter7–ElectricitysystemplanningPAGE97IEA.Allrightsreserved.Chapter7.ElectricitysystemplanningPlanningcreatestheframeworkwithinwhichmarketsoperateAchievingacleanenergytransitionrequireslarge-scaleelectrificationofmanyactivitiesthatcurrentlyrelyonfossilfuels.InIEA’sNetZeroby2050Scenario,electricitydemandnearlytriplesgloballyanddoublesinadvancedeconomies,whereitwasstableoverthelastdecade.Asdemandincreasesrapidlyanddiversifies,theelectricitysystemwillneedtoadapt.ThisimpliesdeployingawiderarrayofcleanelectricityresourcesandbuildingoutsufficientT&Dnetworkstoensurethesystemremainsinbalanceefficiently.Bothoftheseneedtohappenatascaleandpacethatisunprecedentedintheelectricitysector.Inshort,itrequiresamassivetransformationofelectricitysystems,ledbyavisionofanewfutureandplanstoachieveit.Planningmustthereforeconvincemarketplayersthatsufficientvalueisavailabletowarrantinvestment.Powersectorplanningistheprocessbywhichaselectedentity(typically,thesystemoperator)outlinesfeasibleoptionstomeetthefutureneedsforelectricity–effectivelyandefficiently–whileworkingtowardsstatedpolicygoalsforclimateandenergy.Anoverarchingchallengeisthatplanningmustbedonelookingdecadesintothefutureandaccountingforhowvariousaspectsmayevolve.Adequacystudies,forexample,seektodeterminewhatresourcesofwhattypeandlocatedwherecouldbeneededtomeetsystemneedsadecade(atleast)intothefuture.Transmissionplanningaimstoensurethegridwillbecapableofdeliveringelectricitygeneratedbytheseresourcesinlocationsandattimeswheretheycreatevalueforconsumers,electricitycompaniesandsocietyasawhole.Planningpracticesevolvealongwithreformsinthepowersector.Inrecentdecades,injurisdictionsthathavedecidedtoliberalisegenerationandsupply,marketsandinvestmentframeworkswillguidecompetitiveinvestments.Akeyroleofplanningistoprovidetheframeworkunderwhichthemarketsoperate.Withthecleanenergytransitionnowaglobalgoal,theplanningprocessmustalsoensurethatmarketsdesignwillsupportpolicygoals–andidentifynecessaryenhancementstotheirdesign.Traditionalenergysystemsassetsarebig,havelonglifespansandrequirelargeinvestments.Thiscreatesseveralbigchallengesinatimeoftransition.First,SteeringElectricityMarketsTowardsaRapidDecarbonisationChapter7–ElectricitysystemplanningPAGE98IEA.Allrightsreserved.changetendstohappenslowly,inpartbecauseitisnottechnicallyeasytorapidlychangehowsystemsoperateandinpartbecauseincumbentstakeholdersneedtorecouppastinvestments.Second,planningintothefuturein2020isfundamentallydifferentthanithasbeenforpastdecades.Whileplannersareusedtospecifictypesofuncertainty–andindeedtothecertaintyoferrors–withnewtechnologiesthatoperateindifferentwaysandinthecontextofclimatechange,thefutureholdsmanymoresourcesofpotentiallygreateruncertainty.Andthefurtherforwardonelooks,thegreatertheuncertainty.Today’splannersneedtotakeintoaccountuncertaintyinrelationtomorekeyfeaturessuchasthecostofresourcesandtechnologies;demandforgoodsandservices;andenvironmentalandgeopoliticalrealities.Evenstatedpolicieschangeasnewprioritiesariseforgovernments,asillustratedbytherecentadoptionofanassertive,globaldecarbonisationagenda.Thischapterexaminesgoodpracticesbeingdevelopedtoexecutesystemplanningthattakesaccountofthechanginglandscapeofthepowersectorandthegrowingnumberofuncertainties.1PlanningsetsthepathformarketsandpoliciesInthepast,systemplanningwaslargelyatechnicalexercisecarriedoutbyacentralentitywhichhadastrong,monopolisticpositionoverthepowersector.Inthecurrentcontextofanexpandingrangeofresourcesandassets–andastrongerpoliticalagendatoreducetheimpactsenergysystemshaveontheenvironmentandclimatechange–theplanningprocessrequiresmulti-disciplinaryexpertise.Itmusttakeintoaccountavastnumberofinputs,withvariouslevelsofuncertainty.Whilepolicyobjectivesandthecurrentmarketdesignaretheessentialinputstosystemplanning,thedesiredoutputsarealistofthesystemneedsfornewresourcesandflexibility,aplanforgrid,andaroadmaptomeettheseneeds.Often,planningmapsoutseveralpossiblefuturetrajectoriesthatcouldachievethesameendgoals.Planningprovidesdifferentstakeholderswithcrucialinformationthatsupportstheirdifferentaims.Marketplayerswillbasetheirownplanningdecisions(forexample,toinvest)onthesystemplan,asitinformsthemaboutwaystorealiseprofits.Policymakerswillassesspossibletrajectoriesagainsttheirvisionofthefuturesystem,adjustingorcorrectingpoliciesandregulationsasneeded.SteeringElectricityMarketsTowardsaRapidDecarbonisationChapter7–ElectricitysystemplanningPAGE99IEA.Allrightsreserved.PlanningisastrategictooltomeetpolicyobjectivesPlanninghelpsdecisionmakersshapethepowersectortomeet,effectivelyandefficiently,statedpolicygoals.Policygoalsoftenspanseveraldimensionsthatneedtobeaddressedsimultaneously,suchasexpectationsofreliability,affordabilityandclimate-relatedrequirements.Ultimately,somechoicesarestronglydrivenbylong-termpolicychoices(suchasinvestinginnuclearknow-how,developingoffshoregridstoharnesswindresourcesormappingoutahydrogenstrategy).Settingpolicyandsystemplanningisaniterativeprocess:policygoalsarekeyinputstoplanning;inturn,theplanningexerciseprovidesessentialinformationonoptionsandcorrespondingcoststomeetthepolicyobjectives.Planningprovidespolicymakerswithvaluableinformationtoadjustpoliciesandpossiblyincreasetheambitionoftheirobjectivesforthenextplanningcycle.Experienceshowsthevalueofaformalisedfeedbackprocessbetweenplanning,reallifeoperationsandpolicymaking.ArecentIEAanalysisoftheKoreanpowersectorrevealshowplanningcaninformmoredetailedmodellingassessments,allowingpolicymakerstoidentifyadjustmentsrequiredtomeetthelong-termobjectivesofdecarbonisationandsecurity.Underthecurrentframework,wholesalemarketpricesignalsappearinsufficienttoattractinvestmentintonewdispatchablelow-carbongeneration.By2035,Korea’spowersystemwillrequireincreasedcapacityoflow-carbon,flexiblegeneration,suchashydropowerandbatteries,toreplacetheageinganddecommissionedfleetsofcoalandnucleargenerationandensureelectricitysecurity.Theassessment,usinglong-termscenariosasabase,showedthatenhancingwholesalemarketpricesignalstoaccountforscarcitypricingandcarbonpricing,wouldalignmarketsandemissiongoals,therebycreatingfavourableconditionstoenablecleanenergytechnologiestoenterthemarket.PlanninginformsmarketplayersregardingsystemneedsFormarketparticipants,planningprovidescriticalinformationneededtoassessinvestmentopportunitiesandrisks.Thismightincludedataondemandforecastsandtheavailableinfrastructureorvisibilityonpolicychoicesthatfundamentallyinfluencethepowersectoroverthelongterm(e.g.whethertoincludenuclearinthemix).Inturn,marketssupportthesystemthroughtheirabilitytofindefficientsolutionstoaddressuncertainties.Whilethesystemplannermaynotbethebestqualifiedtoprojectfuturecostsoftechnologies,marketscandefinethevalueofresourcesSteeringElectricityMarketsTowardsaRapidDecarbonisationChapter7–ElectricitysystemplanningPAGE100IEA.Allrightsreserved.atvariousmomentsintime.Tothisend,thefinalplanmayincludeoptionsforgridexpansionthathelpcaptureawidevarietyofresourceswithoutimposingaspecificchoice.PlanningsupportsanevolvingsetofrulesPlanninghelpsfindabalancebetweenthetwoconflictingobjectivesofstabilityandflexibilityintherulesgoverningenergysystems.Tosomedegree,itisanexerciseinmappingtrajectoriestowardsamovingtargetasmanythings(technologies,policies,demand,etc.)canchangerapidly.Policymakersandregulatorshavethekeyroleofmonitoringsuchchangesand,asnecessary,interveningtocorrectoradjustruleswhenitbecomesclearthatthecurrentmarketdesignwillnotdeliverthepolicyobjectives.Marketscanbeextremelysensitivetopolicyadjustments,asthesemayincreaserisksforinvestors,sochangesmustbebroughtwithcare.Forthisreason,itiscriticaltohavegovernancestructuresthatdefinetheoverarchingrulesofthesectorintermsofhigh-levelrolesandresponsibilities,andexplicitlysetouttheprocessforadaptingrules(includinghowsuchchangescanbeinitiatedanddesigned).Ifprocessesforreformingrulesaretoocomplex,itcreatesariskthatmarketdesignwillnotbeadapted,whichmayresultinbarriersthatblocktheentryfornewinnovationsandmakesystemoperationsmoredifficult.Inturn,thisheightenstheriskofmakingtheenergytransitionmorecostlyorevenmakingitimpossibleforsystemstoadapttoexogenouschangessuchasclimatechange.Buildinginmechanismssothatplanscanbeadaptedascircumstanceschangeisvital;thatsaid,enactingreformstoooftenandtooquicklycanerodeprivatesectorconfidenceandrisksnegativeoutcomesthatunderminenecessarysupport.Plannersneedtomanageafinebalancebetweenregulatorycertaintyandadaptablegovernance.Theengagementofallstakeholdersiskeytotheprocessforchangingrules.Theevolvingcontextischallengingtraditionalplanningapproaches…UncertaintiesaregrowingPastsystemplanningpracticesfocusedonensuringadequacyofelectricitysupplytomeetdemand,whichwasinherentlyvariableanduncertaintoadegreebutlargelyfollowedwell-known,long-termtrends.Withgreaterdeploymentofvariablerenewables(VRE),digitaltechnologiesanddistributedresources,theparadigmisshifting.Incontrasttotraditionaloperationsinwhichdispatchablegenerationfollowedvariableload,generationitselfhasbecomemorevariableanduncertainSteeringElectricityMarketsTowardsaRapidDecarbonisationChapter7–ElectricitysystemplanningPAGE101IEA.Allrightsreserved.whiledemandhasbecomemoredispatchable.Today,electrificationofnewendusesandintegrationofelectricitywithothersectors(e.g.heating,mobility)expandthescopeofthepowersectorandoffernewopportunities.Theroleofgridscontinuestoevolve,tofacilitatecompetitionandallowmarketstoharnesstheresourcesthatdeliverthegreatestvalue.ThetransitionneedstoacceleratewhileremainingaffordableTheclimateagendahastriggeredasenseofurgencyfordecarbonisingthepowersector,inturn,promptingaccelerationinthedeploymentoflow-carbonsources,mainlyVRE.AlthoughthecostofVREtechnologieshasdropped,thepaceofdeploymentdependsheavilyongridavailability.SeveralfeaturesofVREtriggertheneedtoadaptplanningpractices.Forexample,locationswherewindandsolarpotentialarehighestmayberemotefromloadcentres.Assuch,acompromisemayneedtobemadebetweenthevalueofharnessingwindandsolarpotentialandthecostofdevelopingthetransmissiongridtodeliverit.TheabsenceofalocationalsignalhaspromptedChinatomakehugeinvestmentsindevelopingmassiveinfrastructuretobringpowerfromresource-richareasinthenorthandwesttothecitiesconcentratedontheeastcoast.AnotherfeatureisthatVREplantscanbedeployedinafewmonths,muchquickerthancentralisedpowerplants.Incontrast,largetransmissionprojectstendtobeslow,mainlybecauseofpermittingissues.…butseveralgoodpracticesareemergingWithpowersectorsaroundtheworldfacingsimilarchallenges,severalgoodpracticesareemerging.Whentakentogether,theserecommendedpracticessupportdevelopmentofelectricitysystemsthatdeliverwithagoodconfidenceonpolicyobjectivesandatthebestvalue-costratioforthewholesystem,inco-ordinationwithawiderangeofstakeholdersandacrosssectors.Gridplanningshouldfavourinvestmentinlocationsthatdeliverbestlong-termvalueInaperfectmarket,resourcescompetewitheachotheronalevelplayingfield.Inreality,electricitysystemswillalwaysbelimitedbyphysicalconstraints.Therefore,locationalsignalsplayanessentialroleinidentifyingthebestlocationsforresources.Whilemarketscanprovidedailytoseasonallocationalsignals,thevolatilityofthesesignalscanleadtounderinvestment.Locationalsignalsonalongerterm,whichshouldhelpinvestorsidentifythebestlocationstoinvest,dependonthetransmissionsystem.Indeed,thetransmissionSteeringElectricityMarketsTowardsaRapidDecarbonisationChapter7–ElectricitysystemplanningPAGE102IEA.Allrightsreserved.systemisanessentialenablerofmarketsandcanbeasubstitutetobuildingnewresources.Policymakersandregulatorscanusevariousmechanismstoincentiviseefficiencyinthechoicesmadetodeploygridsandresources.Amongothers,theapproachtotransmissioncharges(thewaytransmissioncostsarerecoveredandallocatedamongusers)canbeimportant.Thepushforelectrificationis,indeed,creatingtheneedformoregrids.Theroadmaptonetzeroby2050requires–inthedecade2020-30–multiplyingbythreetheannualinvestmentinT&Dgrids.Holisticandpro-activegridplanninghelpsassessthefullsystemvalueoftransmissionprojectsoverthelongtermandensureenoughgridsarebuilt.Multi-value,portfolioplanningrecognisesthateverygridexpansionprojectmayhavemultiplebenefitsandseekstooptimiseaportfolioofinvestmentsacrossthecompleterangeofneeds.Individualprojectsareselectedsothattheycollectivelycontributetoincreasedreliability,satisfyeconomicandpublicpolicyrequirements,reduceseamsbetweenmarkets,andenableinterconnectionoflow-carbonresources.Thisapproachbringscost-efficiencyandacceleratestransmissiongriddevelopment.Efficientgriddevelopmentcananticipatethebestwaytomeetfuturesystemneeds,ratherthanreactivelyrespondingtoalistofinterconnectionrequestsfromstakeholders.Thecreationofrenewableenergydevelopmentzones(REDZ)isanexampleofpro-active,portfolioplanning.REDZaregeographicalareaswithhighqualityVREresourceswheredevelopingclustersoflarge-scalerenewablegenerationcandelivereconomiesofscale.Bydevelopingnetworkstoconnectseveralgenerationsourcesatdifferentlocations(insteadofproceedingprojectbyproject),REDZenableefficientconnectionofrenewables.REDZalsohavepotentialtopromotedevelopmentoflocationsofhighsystemvalue–i.e.asetoflocationsthatexperiencehighwindspeedsorsolarinsolationwhenthesystemmostneedsadditionalgeneration(e.g.duringsystempeaks).REDZarebeingusedinseveraljurisdictionstoboostuptakeofrenewableenergyincluding:theCompetitiveRenewableEnergyZones(CREZ)inTexas;theAustralianEnergyMarketOperator’s(AEMO)integratedsystemplaninAustralia;theRenewableEnergyDevelopmentZones(REDZ)initiativeinSouthAfrica;andtheSchémasrégionauxderaccordementauréseaudesénergiesrenouvelables(S3REnR)inFrance.Thisapproachcanbeappliedtobothonshoreandoffshoredevelopments:theambitiousplansofEuropeforoffshorewindcannotbemetwithoutstrongco-ordinationandthecreationofadedicatedoffshoregrid.SteeringElectricityMarketsTowardsaRapidDecarbonisationChapter7–ElectricitysystemplanningPAGE103IEA.Allrightsreserved.Plannersshouldadoptrobustapproaches,designedtodealwithuncertaintiesPlannersfacemanyuncertainties.Markets,ifprovidedwiththenecessaryframeworkandinformation,canhelpfindefficientsolutionstoaddressthem.Theplanningprocessneedsrecogniseboththeuncertaintiesandelementsthatcannotbefullycontrolled(e.g.futuredemandandcostoftechnologiesandresources)andadoptariskmanagementmindset.Engagingstakeholdersearlyintheprocessishelpfultounderstandwhichuncertaintiesarerelevant.Threetoolscanthenhelpplannerstakeintoaccounttheseuncertainties:scenario-basedplanning,sensitivityanalysisandstochasticapproaches.Scenario-basedplanningusesmodellingtoconsiderabroadrangeofpossiblelong-termfuturesandreal-worldconditions.Thekeybenefitofscenarioanalysisistheabilitytocaptureaplausiblerangeofcontrasting,possiblefuturesandidentifydifferentchallengestothesysteminherentineachthatneedtobeaddressed.Scenarioscancompareamongmanysystemattributes,forexamplecontrastingafuturewithlarge,centralisedrenewableplantsagainstonewithdistributedresources,orassessingtheroleofaspecifictechnology(suchasnuclearorlarge-scalebatterystorage).Rankingscenariosaccordingtotheirlikelihoodordesirabilitycanfurtherinformdecisionmaking.Sensitivityanalysiscanbeusedseparatelyortocomplementscenario-basedplanning.Sensitivitiestokeyparameters(orsetsofparameters)areappliedtoobservehowvariationstotheseparametersaffectoutcomes.Often,theyareusedtotestrobustnessagainstspecificassumptions.Outofthepossiblescenariosthatmeetpolicyobjectives,sensitivityanalysiscanhelpidentifythosedeemedrobustwithrespecttothekeyassumptionsthatshouldthusberetained.Italsorevealswhichscenariosshouldbediscarded,forexample,ifcostsorsocietalconsequencesbecomeunacceptableoutsideofalimiteddomainforthemainparametersthatarenotundercontrol.Typicalparametersusedinsensitivityanalysisinclude:fuelsandcarbonprices;thelong-termsocietalcostofemissions;thecostofcapital;climateyear;load(howenergyefficiencyperformsandthepaceofelectrificationofnewuses);phasein/outofspecifictechnologies;andtimingofnewgenerationandretiringunits(aswellasimpactsofdelays).SouthAfrica,forexample,incorporatedinitsintegratedresourceplantheproductivityofthermalpowerplantsandtheconsequencesofnotmeetingexpectedtargets.Stochasticorprobabilisticadequacyassessmentsgivemoreinsightsformodernpowersystemsastheyallowplannerstoevaluatemanyuncertaintiestogether.Pastplanningpracticestendedtobedeterministic.Continuingtousetheseapproachestodaywouldleadtoinefficient,conservativeoutcomes.StochasticapproachesmakeitpossibletodeterminemoreaccuratelythecontributionofVREtothesystemandtoconsiderrareeventswithpotentiallargeconsequences(“tailSteeringElectricityMarketsTowardsaRapidDecarbonisationChapter7–ElectricitysystemplanningPAGE104IEA.Allrightsreserved.risks”),suchasextremeweatherevents(e.g.aweekofcoldweathercombinedwiththeabsenceofwindandsun)orfailuresduetothegrowingthreatofcyber-attacks.Initslong-termadequacystudy,RTE(theFrenchtransmissionsystemoperator[TSO])considersarangeofscenariosandsensitivitieswithrespecttoseveraluncertainparametersandappliesastresstestunderextremebutrealisticweatherconditions.AssessmentofFrenchsystemadequacyforvariousscenarios,takingintoaccountthemainuncertaintiesNote:Thegraphshowsthemargin(whenpositive)orgap(whennegative)withrespecttotheprobabilisticcriterionformeetingsystemadequacywithmarket-basedmechanisms.Theassessmentconsidersseveralscenariosarticulatedaroundthereferencescenarioissuedbyauthoritiesintheir2020multi-annualplan(PPE),aswellassensitivitiestoaddressthemainuncertainties.Source:RTE(2021),Frenchlong-termadequacystudy.Cost-benefitanalysisshouldpromoteallcost-effectivesolutionsAspowersystemsevolve,planningplaysaroleinpromotingallcost-effectivesolutions.Thisimpliesassessingandcomparingthevalueofallinvestmentsandresources:grids,energystorageandnewcentralgeneration,aswellasdistributedresources(whichmayincludeBTMstorage),demandresponseandenergyefficiency.InCalifornia,theeffectiveload-carryingcapacityapproachmakesitpossibletocomparethecontributionofvariousresourcestosystemreliabilityandatwhichcost.Cost-benefitanalyses(CBA)canensureoptimaleconomicvalueofpowersystemsoverthelongterm.Itshouldbenotedthatprojectcostsaretypicallyindependentfromscenarioswhilebenefitsarestronglyrelatedtoscenario-specificassumptions.TraditionalCBAmethodologiesoralternativeapproachesarenowSteeringElectricityMarketsTowardsaRapidDecarbonisationChapter7–ElectricitysystemplanningPAGE105IEA.Allrightsreserved.beingadaptedtovalueallsolutions,notonlysupply-sideresources.Inparticular,itmustbepossibletocompareinvestmentsthatreduceoperatingcostsandsolutionsthatdefernewinvestmentsattheexpenseofslightlyhigheroperatingcosts.Emergingsolutionsthatfitintothelattercategoryincludegrid-enhancingtechnologies,dynamiclineratingandflowsoptimisationsoftware,asdonewpracticessuchasadhocmodulationsinVREgenerationtoavoidbuildinginfrastructurethatwouldremainunusedformostofthetime.Afullassessmentofbenefitsmustconsidermanyindicators.Whileeconomicquantification(ormonetisation)canbedoneinastraightforwardmannerforsomeindicators;itreliesonstrongassumptionsforothers.Thebenefitofmonetisingallindicatorsistocomparescenariosthroughasingle,financialindicator.Usingseparateindicators,however,allowspolicymakerstoexaminescenariosandsolutionsaccordingtovariousperspectives(notnecessarilyfinancial)andidentifyprioritiesforpoliciesandregulatoryinitiatives.TheassessmentframeworkforgriddevelopmentprojectsusedbytheEuropeanNetworkofTransmissionSystemOperatorsforElectricity(ENTSO-E)comprisesthreemaincategories:costs,benefitsandresidualimpacts.Withineachcategory,itassessesanumberofsimpleandrobustindicatorsaccordingtoamethodologyconsistentwithEuropeanpolicyobjectives.Inadoptingacombinedcost-benefitandmulti-criteriamatrixtoassessprojects,thismethodologyensuresaconsistentassessmentoftrans-nationaltransmissionandstorageprojectsinEurope.SteeringElectricityMarketsTowardsaRapidDecarbonisationChapter7–ElectricitysystemplanningPAGE106IEA.Allrightsreserved.TheENTSO-EframeworkforgriddevelopmentprojectassessmentIEA.Allrightsreserved.Note:Residualimpactsreferstotheimpactsofinvestmentsthatarenotaddressedbyanyoftheidentifiedmitigationmeasurescontainedwithinthecostcategory.Thisensuresthatallmeasurablecostsassociatedwithprojectsorinvestmentsaretakenintoaccountandthatnodoubleaccountingoccursbetweenanyoftheindicators.Source:ENTSO-E(2021),3rdGuidelineforcostbenefitanalysisofgriddevelopmentprojects.Mandatetransparencyandstakeholderengagement,asbothbenefittheplanningprocessandcompetitiveinvestmentsPublicandstakeholderconsultations–inconjunctionwithconsultationofrelevantauthorities–allowtheinterestsofallinterestedpartiestobeconsidered,therebyimprovingthequalityoftheplanningprocess.Ingatheringawiderrangeofexpertise,suchconsultationsincreasetransparency,minimiseconflictsofinterestforthepartyleadingtheprocessandincreasebuy-inoftheoutcome.Thisisincreasinglyimportantasthetransformationofelectricitysystemsthatwilldrivetheenergytransitionneedstobecentredaroundpeople.SteeringElectricityMarketsTowardsaRapidDecarbonisationChapter7–ElectricitysystemplanningPAGE107IEA.Allrightsreserved.TheArgentinianelectricityreformof1992(Law24065)wasoneofthefirstpoliciestoinvolvegridusers(atthetime,generators,distributioncompaniesandlargeconsumers)inaprojectofgridexpansionplanningtoconnectagroupofremotegeneratorstoloadcentreslocatedhundredsofkilometresaway.Innovativeatthetime,thepubliccontestapproachstimulatedeconomicawarenessandenabledmoreefficientdecisionmaking.Underthisapproach,thesystemoperatoridentifiedbeneficiariesoftransmissionprojectsanddistributedcostsaccordingtothe“beneficiarypays”principle.Inturn,theoperatorassignedvotingrightstomajorgridusersinproportiontoeachoftheirproposedparticipationcosts.Expansionprojectswereapprovedonlyifatleast30%ofvoteswereinfavourandnomorethan30%ofvoteswereopposed.Thestakeholderengagementwassuccessful,andcriticismoftheprocessfocusedmainlyonthemethodofidentifyingprojectbeneficiaries.Aspowersystemsbecomemorecomplex,largerandmorediversified,itbecomesimpossibleforasingleentitytoperformtheplanningworkordesignmarketsinisolation.Theprocessnowrequiresthesupportandscrutinyofmanystakeholderswithdifferentperspectives.Inthiscomplexenvironment,stakeholderengagementisbeneficialacrossthecompleteplanningcycle.Generally,stakeholderengagementiswellreceivedbutorganisersmusttakecaretouseefficientlythetimeandexpertiseofparticipants.Diverseformatsandplatformsmayfacilitateparticipationfromalargeaudience.Opportunitytoprovidefeedbackontheprocessisnecessary(forexample,commentingontheperiodicityofinformationwebinars,durationofformalconsultations)toimproveforthenextexercise,asillustratedbytheevaluationmandatedbythePublicUtilityCommissioninCalifornia.Plannersshouldbemandatedtoengagewithstakeholders,withconsultationsfromearlystages(e.g.theproposedpolicyobjectivesandtargets)andatkeymomentssuchasthecollectionofinputs,definitionofplanningscenarios,preparationofkeymethodologies(e.g.CBA),andinterpretationofresults.InEurope,tosupportimplementationofmainlegalrequirements,theenergylawrequiresTSOstoco-hostwiththeregulatoryagenciesarangeofstakeholdercommitteeswithperiodicmeetings.InAustralia,inpreparingtheintegratedsystemplan(ISP),theAEMOmustfollowastakeholderengagementprogrammethatincludesmultiplepublicstakeholderworkshops,webinarsandtwoformalwrittenconsultations.SteeringElectricityMarketsTowardsaRapidDecarbonisationChapter7–ElectricitysystemplanningPAGE108IEA.Allrightsreserved.ComprehensivestakeholderengagementprogrammeofAEMOforits2020integratedsystemplanIEA.Allrightsreserved.Source:AEMO(2020),IntegratedSystemPlan–stakeholderengagement.Integratedandco-ordinatedplanningshouldbecentraltodesigningfutureenergysystemsInunbundledpowersystems,regulatedT&Dnetworksaretypicallymanagedbyutilitiesthatareseparatefromentitiesparticipatingincompetitiveactivities(generation,aggregation,tradeandsupply).Astheyhavedistinctyetinterdependentactivities,lackofalignmentbetweentheseseparatedentitiesmayleadtosub-optimalplanning.Inordertoidentifyappropriateoptionsforfuturepowersystemsandmaximisetheireconomicvalueforconsumers,integratedandco‑ordinatedplanningframeworksaddresstogetherthefunctionsofgeneration,T&Dnetworks,demand-sideandelectrificationofothersectors.Suchframeworksaimtoharnessthebenefitsofbothcompetitionandco-optimisationofgridsandresources(including,inabroadsense,demand).Withtheaimofbreakingsiloswithinthesectorandbetweensectors,integratedandco-ordinatedplanningcantakeseveralforms,butallsharetheabilitytoconsiderawiderrangeofsolutionstomeetfutureneedsforsystemflexibility.SteeringElectricityMarketsTowardsaRapidDecarbonisationChapter7–ElectricitysystemplanningPAGE109IEA.Allrightsreserved.Majorcomponentsofpowersectorplanningandvariousformsofco-ordinatedandintegratedplanningapproachesIEA.Allrightsreserved.Source:IEA(2017),StatusofpowersystemtransformationandIEA(2018),Thailandrenewablegridintegrationassessment.Thefirst,obviousformofintegrationandco-ordinationistoplanandco-optimisegenerationandtransmission,asillustratedbyREDZ.Thenextstepistoconsiderdemandasintegraltotheplanratherthanasaninput.TheIntegratedResourcePlaninCaliforniaisagoodexampleinthatitassessesthecostofreachingaspecificemissionslevelwhileconsideringdemandandBTMresourcesasactivesystemcomponents.Asdistributiongridshostagrowingshareofgenerationandplayamoreactiverole,co-ordinationofT&Dplanningtakesintoaccountthevarietyofflowpatternsandthepotentialofdemand-sidemanagementtodeferoravoidinvestmentingenerationandnetworks.InEurope,apan-EuropeanDSOentitywasrecentlylaunched,withoneofitsmaintasksbeingtopromoteco-ordinatedplanningofDSO/TSOnetworks.Electrificationofenduses,suchasmobilityandheating,increasesdemandforelectricitybutalsooffersnewopportunities.Cross-sectoralplanningacrosselectricitysectorsandothersectorsenablestheemergenceofnewsolutionstosecuretheneededfuturesystemflexibility.EVswithsmartchargingcan,forexample,beusedtoprovideflexibilityandfacilitateVREintegration–bychargingduringperiodsofhighVREoutputandsupplyingtothegridwhenoutputdeclines.Inlightofdependencyonnaturalgassupplies,Europe’sTen-yearNetworkDevelopmentPlan(TYNDP)has,since2018,beenpublishedjointlybyENTSO-EandEuropeanNetworkofTransmissionSystemOperatorsforGas(ENTSOG)(respectively,theassociationsofTSOsforelectricityandnaturalgasnetworks).SteeringElectricityMarketsTowardsaRapidDecarbonisationChapter7–ElectricitysystemplanningPAGE110IEA.Allrightsreserved.Finally,planningacrossdifferentregions,jurisdictionsandbalancingareasiscriticaltooptimisingtheuseofresources–andisparticularlybeneficialwiththeincreasingshareofVRE.Europe’sTYNDPisaprominentexampleofregionalco-ordinationintransmissionplanninginthatitassessesalllarge-scalestorageandtransmissionprojectsacrossEurope.ProjectsofCommonInterest(PCIs)areselectedaccordingtotheircontributiontoEuropeanpolicygoalsandwillbenefitfromacceleratedlicensingprocedures,improvedregulatoryconditionsandsomeaccesstofinancialsupport.InterregionalplanningintheUnitedStatesandamongtheAssociationofSoutheastAsianNations(ASEAN)areotherexamples.Integratedandco-ordinatedplanningmustnotbeconfusedwithcentralplanningWhiledifferentanddistinctfromcentralplanning,integratedandco-ordinatedplanningretainsthebenefitsofplanningthewholesystem,ratherthanplanninggridsseparately.Incentralplanning,asingleentityelaboratesandexecutestheplanwhileanauthority(aministryoranindependentregulator)approvestheplananddevelopsastrategyforrecoveryofcosts–oftenthroughtariffsappliedtoenergyconsumers.Incontrast,integratedandco-ordinatedplanningisacollaborativeframeworkthatinvolvesalargenumberofstakeholdersrangingfromtraditionalenergysectoractorstoindependentbusinessesandcivilsocietygroups.Theentityleadingtheprocessisgivenamandatebyauthoritiestocollectdata,performcalculations,organisestakeholderconsultationsanddeliverresultstothepublicandpolicymakers.Ultimately,theleadingentity'smainroleistopresentcost-efficientpathwaysthatmeetthepolicygoalsandprovideclearsignalstostakeholdersastowhereinvestmentsareneededandvaluable.ComparisonoftwoholisticsystemplanningapproachesCentralpowersectorplanningIntegratedandco-ordinatedsystemplanningLeaderAcompanythatownstheassetsAselectedentitywithaneutralrole,ideallywithnoconflictofinterestInputssourcesOwndata/models,complementedwithdatacollectionfromselectedstakeholderswithessentialinputstotheprocessVirtuallyunlimited,fromabroadrangeofsources(whoeverwishestocontribute)thatmayhaveconflictinginterestsObjectivesMeetlegalrequirements(reliability,sustainability)andbalancesheetconstraintsorshareholdersreturnMeetclimateandenergypolicyobjectivesandmaximiseoverallmarketbenefitsatreasonableriskSteeringElectricityMarketsTowardsaRapidDecarbonisationChapter7–ElectricitysystemplanningPAGE111IEA.Allrightsreserved.CentralpowersectorplanningIntegratedandco-ordinatedsystemplanningOutputsAplanfocusedoninvestmentsSeveraloutputstoguidedecisionsofpolicymakersandmarketplayersTransparencyAssumptionsanddetailsmayberestricted,withonlyheadlinesmadepublicStakeholderconsultationstodevelopscenarios,selectsensitivitiesandchallengeassumptions;resultsmadepublicandopentodebateAEMO’sintegratedsystemplan(ISP)Withtheexpressaimofmaximisingvaluetoendconsumers,theAEMOinAustraliahasputintopracticeitsISPthatseekstodesignthelowestcost,secureandreliableenergysystemcapableofmeetinganyemissionstrajectorydeterminedbypolicymakersatanacceptablelevelofrisk.Thisapproachservestheregulatorypurposeofidentifyingactionableandfutureprojects,aswellasthebroaderpurposeofinformingmarketparticipants,investors,policydecisionmakersandconsumers.Itprovidesatransparent,dynamicroadmapoveraplanninghorizonofatleastthenexttwodecades,optimisingnetmarketbenefitswhilemanagingtherisksassociatedwithchange.TheAEMOpublishedtheinauguralISPin2018anditisupdatedeverytwoyears.Manyalternativeinvestmentdecisionsmaybeabletomeetfuturesystemrequirements.TheAEMOassessesalloptions,usingCBAtoidentifytheleast-costdevelopmentpathforeachscenario.Tooptimisetheeconomicvalueofthepowersystem,thenetpresentvalues(NPV)ofallcandidatedevelopmentsarecomparedtoabaselineandtoeachotheroverthefullplanninghorizon.Finally,theISPdeliversaroadmapwithpre-establisheddecisionmilestones(orsignposts)toconfirmtheneedandtimingofconsideredmajortransmissionprojectsaccordingtocircumstancesthatmaychangeinthemeantime.SteeringElectricityMarketsTowardsaRapidDecarbonisationChapter7–ElectricitysystemplanningPAGE112IEA.Allrightsreserved.AssessmentoftheNPVofaselectedtrajectoryIEA.Allrightsreserved.Note:Thegreenlinerepresentsthenetbenefitsoftheproposeddevelopmentpath.FOM:fixedoperationandmaintenancecost,VOMvariableoperationandmaintenancecost,DSP+USE:demand-sideparticipationandcostofunservedenergy,REZ:estimatedcostofincreasinghostingcapacityoffuturerenewableenergyzones.Source:AEMO(2020),Integratedsystemplan–costbenefitanalysis.FinalrecommendationsWithinmarket-basedpowersystems,planningplaysakeyroleinprovidinginformationfordecisionmakingbypolicymakersandstakeholders.Asdecarbonisationofenergysystemsmustaccelerate,planningpracticesareevolvingtowardsmoreholisticapproachesthataimtoengageallstakeholders,creatingaframeworkwithinwhichmarketsoperatetoattractprivateinvestmentsanddeliverefficiencies.Forplanningtoserveitspurposeofsupportingeffectiveandefficientdecisionmaking,thefollowingkeyrecommendationsshouldbeconsidered:Applyaholisticapproach:planningshouldstrategicallyconsiderthewholepowersystemandhowallassets–generation,T&D,anddemand–needtoworktogetherandinteractwithothersectors.Carryoutdetailedcost-benefitanalysis:takingaccountofthecostsandvaluesofalltechnologiesandoptionsfacilitatescomparison–onequalgrounds–ofallcost-effectivesolutions.Identifyandaddressalluncertainties:byusingmultiplescenarios,assessingsensitivitiestokeyassumptionsandadoptingstochasticapproaches,plannerscanadoptarisk-basedmindsetthatappropriatelyconsidersthemanySteeringElectricityMarketsTowardsaRapidDecarbonisationChapter7–ElectricitysystemplanningPAGE113IEA.Allrightsreserved.uncertaintiesoffuturesystems,includingexogenousriskssuchasextremeweatherevents.Consultallstakeholders,earlyandoften:thecompleteplanningprocessshouldbetransparentandincludeextensivestakeholderengagementtocapturethemanybenefitsdiverseexpertiseandexperiencebringstoplanningandmarkets.Establishgovernancestructureswithadaptationinmind:planningframeworksshouldincludeaformalisedfeedbackmechanismthatcoversplanning,policymakingandmarketdesignandaclearprocessforadaptingrulesasneededtomeetdecarbonisationgoalsThispublicationreﬂectstheviewsoftheIEASecretariatbutdoesnotnecessarilyreﬂectthoseofindividualIEAmembercountries.TheIEAmakesnorepresentationorwarranty,expressorimplied,inrespectofthepublication’scontents(includingitscompletenessoraccuracy)andshallnotberesponsibleforanyuseof,orrelianceon,thepublication.Unlessotherwiseindicated,allmaterialpresentedinfiguresandtablesisderivedfromIEAdataandanalysis.Thispublicationandanymapincludedhereinarewithoutprejudicetothestatusoforsovereigntyoveranyterritory,tothedelimitationofinternationalfrontiersandboundariesandtothenameofanyterritory,cityorarea.IEA.Allrightsreserved.IEAPublicationsInternationalEnergyAgencyWebsite:www.iea.orgContactinformation:www.iea.org/about/contactTypesetinFrancebyIEA-September2022Coverdesign:IEAPhotocredits:©GettyImages

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