LEAVINGNOONEBEHINDC1WHOLESALEELECTRICITYMARKETDESIGNRationaleandChoicesREPORTPublicDisclosureAuthorizedPublicDisclosureAuthorizedPublicDisclosureAuthorizedPublicDisclosureAuthorizedWHOLESALEELECTRICITYMARKETDESIGNRationaleandChoicesREPORTABOUTESMAPTheEnergySectorManagementAssistanceProgram(ESMAP)isapartnershipbetweentheWorldBankand24partnerstohelplow-andmiddle-incomecountriesreducepovertyandboostgrowththroughsustainableenergysolutions.ESMAP’sanalyticalandadvisoryservicesarefullyintegratedwithintheWorldBank’scountryfinancingandpolicydialogueintheenergysector.ThroughtheWorldBankGroup(WBG),ESMAPworkstoacceleratetheenergytransitionrequiredtoachieveSustainableDevelopmentGoal7(SDG7)toensureaccesstoaffordable,reliable,sustainable,andmodernenergyforall.IthelpstoshapeWBGstrategiesandprogramstoachievetheWBGClimateChangeActionPlantargets.Learnmoreat:https://esmap.org.©2022NovemberInternationalBankforReconstructionandDevelopment/TheWorldBank1818HStreetNW,Washington,DC20433Telephone:202-473-1000;Internet:www.worldbank.orgSomerightsreserved.RightsandPermissionsThematerialinthisworkissubjecttocopyright.BecausetheWorldBankencouragesdisseminationofitsknowledge,thisworkmaybereproduced,inwholeorinpart,fornoncommercialpurposes,iffullattributiontothisworkisgiven.Anyqueriesonrightsandlicenses,includingsubsidiaryrights,shouldbeaddressedtoWorldBankPublications,WorldBankGroup,1818HStreetNW,Washington,DC20433,USA;fax:+1-202-522-2625;e-mail:pubrights@worldbank.org.Pleasesendacopyofthepublicationthatusesthisworkasasourcetotheaforementionedaddress,ortoesmap@worldbank.orgATTN:ESMAPProgramManager.ThisworkisavailableundertheCreativeCommonsAttribution3.0IGOlicense(CCBY3.0IGO)http://creativecommons.org/licenses/by/3.0/igo.UndertheCreativeCommonsAttributionlicense,youarefreetocopy,distribute,transmit,andadaptthiswork,includingforcommercialpurposes,underthefollowingconditions:Attribution—EnergySectorManagementAssistanceProgram.2022.WholesaleElectricityMarketDesign:RationaleandChoices.Washington,DC:WorldBank.License:CreativeCommonsAttributionCCBY3.0IGO.Translations—Addthefollowingdisclaimeralongwiththeattribution:ThistranslationwasnotcreatedbytheWorldBankandshouldnotbeconsideredanofficialWorldBanktranslation.TheWorldBankshallnotbeliableforanycontentorerrorinthistranslation.Adaptations—Addthefollowingdisclaimeralongwiththeattribution:ThisisanadaptationofanoriginalworkbyTheWorldBank.Viewsandopinionsexpressedintheadaptationarethesoleresponsibilityoftheauthor(s)oftheadaptationandarenotendorsedbytheWorldBank.Third-PartyContent—TheWorldBankdoesnotnecessarilyowneachcomponentofthecontentcontainedwithintheworkanddoesnotwarrantthattheuseofanythird-partyownedindividualcomponentorpartcontainedintheworkwillnotinfringeontherightsofthosethirdparties.Ifyouwishtoreuseacomponentofthework,itisyourresponsibilitytodeterminewhetherpermissionisneededforthatreuseandtoobtainpermissionfromthecopyrightowner.Examplesofcomponentscaninclude,butarenotlimitedto,tables,figures,orimages.ProductionCredits—ProductionEditorHeatherAustin,TheWorldBankDesignerCircleGraphics,Inc.ImagesCover:OliverKnight/WorldBankAllimagesremainthesolepropertyoftheirsourceandmaynotbeusedforanypurposewithoutwrittenpermissionfromthesource.WHOLESALEELECTRICITYMARKETDESIGNiiiContentsKeyFindingsviAcknowledgementsviiiAbbreviationsixExecutiveSummaryx1.TheEvolutionandCurrentStateofPowerMarketsxii2.WhyMarketReform?8EvidenceonthePerformanceofSystemswithCompetitionintheMarket9PreconditionsofSuccessfulMarketReform103.KeyElementsofMarketStructure14CreatingaCompetitivePlayingField:Unbundling15LegacyIssues17StrandedCosts17LegacyContracts18NaturalMonopolySegmentswithinIntegratedSystems20OpenAccess21SystemPlanninginMarketSystems21GovernanceArrangements23OverviewofGovernanceIssues23DesignOptionsforImplementingAgencies264.ElectricityMarketDesign28Operations30OptimalDispatchintheReal-TimeSpotMarket30TypesofMarkets30PriceFormationinMarkets33SequenceofMarketsandIntertemporalHedging35ImbalanceSettlementandForwardMarkets36CongestionManagementandPricing38Investment39Energy-OnlyMarkets41CapacityMarkets43Mandatory,Long-TermContracts44ivCONTENTSAncillaryServices45RegulationandContingencyReserves46SystemStability46ProcurementofAncillaryServicesandCo-Optimization47RemediesfortheAbuseofMarketPower47Markets,ClimateChange,andEnergyTransformation48ControllingEmissionsandCarbonPricing49VariableRenewableEnergyandBatteryEnergyStorage50DistributedEnergyResources:DistributedGeneration52DistributedEnergyResources:DemandResponse535.UndertakingReform54ReformProcess:MarketObjectivesandCountryContext55ReformProcess:ChecklistforImplementation57Step1.AssessmentofPrerequisitesforReform57Step2.ChoiceofMarketDesign58Step3.MarketCommencement60Endnotes62Glossary67Bibliography71WHOLESALEELECTRICITYMARKETDESIGNvListofFigures,TablesandBoxesListofFiguresFigure1.1:PercentageofDevelopingCountriesAdoptingSomeDegreeofUnbundlingoverTime5Figure1.2:IntroductionofWholesaleElectricityMarkets5Figure1.3:StatusofElectricityMarketsin20206Figure3.1:AnExampleofaPowerSectorStructureAllowingOpenAccess22Figure4.1:Demand-SupplyCurvefortheIndianEnergyExchange33Figure4.2:ElectricityMarketTimeline35Figure4.3:CumulativeStorageDeploymentbyCountry,Projections2018–3051ListofTablesTable2.1:OverviewofPreconditionsamongGroupofCountriesattheTimeofaReform11ListofBoxesBox1.1:MarketReforminPeruandColombia4Box3.1:Vietnam’sPowerSectorReform16Box3.2:IndependentPowerProducers19Box3.3:EstablishmentofTurkey’sEnergyRegulator25Box4.1:FulfillingLong-TermContractsinMarketsinGrossandNetPools37Box4.2:TakingMeasurestoPreventWithholdingofCapacity42viFOREWORDKeyFindingsWhilethereisnowanabundanceofresearchandafirstcropoftextbooksonthetopicofcompetitioninelectricitymarketsandtheirdesign,theliteraturetailoredtodevelopingcountriesissurprisinglythin.Extensiveresearchonmarketsindevelopedcountriescanassistinthedesignofmarketselsewhere,butdonotprovideready-madeplans.Intelligentmarketdesignneedstoconsiderthestateofdevelopment,includingpotentiallydifferentpolicyobjectivesandtheinstitutionalcapacityofdevelopingcountries.Tofillthisgap,the2019WorldBankreport,RethinkingPowerSectorReformintheDevelopingWorld,tookstockofthenatureandpaceofpowersectorreformsenactedinthedevelopingworld.Itscomprehensive,historicalperspectivehighlightedpreconditionsfortheintroductionofamarket.Further,anupcomingreportfromtheInternationalFinanceCorporation,“CreatingMarkets:PowerMarketsforDevelopment,”classifiespowersystemsandmarketsin230countriesandterritoriesandhighlightssomeoftheirdesignfeatures.Bothworksarevaluable,citingrecentsourcesofinformationaboutelectricitymarkets.Aprimerthatunitestheconceptsunderlyingthedesignofanyelectricitymarketwithdesignconsiderationsthatconsiderthecontextsofdevelopingeconomies,includinglocation-specificissues,pitfallstoavoid,andgloballessonslearned,wouldbeausefulcomplement.Thepresentprimerisintendedassuchaprimer.Itdoesnotprovidepredefined“bestsolutions,”butinsteadlaysoutkeydesignprinciplesandmarketdesignchallenges.Reflectingthecurrentstateoftheart,theprimeraimstosupportpolicymakerscontemplatingmarketreform,aswellastheiradvisors,bypresentingdebatesaboutmarketdesigninnontechnicalterms.Thisprimerdistillskeypointsfromtextbooksandthebroaderacademic/industryliterature.Itextrapolatesthecoreissuesandconceptsthattypicallyfilla400-pagetextbookorseveralthousandpagesoftechnicalresearchpapersintoasuccinct,60pagesofnontechnicaldescriptionsusefulforWorldBankstaff,consultants,andstakeholderorganizationsinpartnercountries.Unbundlingverticallyintegratedmonopoliesiswellunderstood,butjustthebeginningofreform.Electricitymarketsdonotrespondwelltolaissez-faireapproaches.Theyrequiremarketdesign,carefullycraftedforeachsystemtomeetspecificpolicyobjectivesthatoftengobeyondcostreductionthroughcompetition.Thisprimerwalksreadersthroughthecomplexmazeofbenefits,issues,andtrade-offs.Asitpresentsdesignoptions,ithelpsreaderstoframetherightquestionsinordertoexploretheseoptionsingreaterdepth.Thedesignsofelectricitymarketsarestillevolving.Barelythreedecadesago,itbecamefeasibletointroduceadvanced,bid-basedelectricitymarketscompatiblewiththephysicaloperationofapowersystem.Globally,56countriesnowfeaturepowersystemswithWHOLESALEELECTRICITYMARKETDESIGNviicompetitive,cost–orbid–basedwholesalemarkets.TheseincludemostcountriesintheAmericas,Europe,andOceania(exceptforsmallislandeconomies),aswellasagrowingnumberofcountriesinAsia:India,Japan,thePhilippines,Singapore,andtheRepublicofKorea.Chinaisexperimentingwithcompetitive,wholesalemarketsinseveralprovinces.Yet,onlyoneinfivedevelopingcountrieshasintroducedawholesalemarketduringthepast25years.Severalotherdevelopingcountriesareexploringwhetherandhowtomovetowholesaleelectricitymarkets.Asnewtechnologiesareintroducedbothonthesupply(e.g.,renewableenergy,batterystorage)anddemand(e.g.,electricvehicles,distributedgeneration,demandresponse)sides,greatermarketdesignchallengesareposedtomanyclientcountries,whethertheyhaveaworkingmarketorareconsideringestablishingone.Amidgrowingappreciationoftheconstraintsofrelativelysmall,developingsystems,interestisrisinginregionalelectricitymarketsandregionalpowerpools,withexamplesofferedbyadvancedregionalmarketssuchastheSouthernAfricanPowerPool(SAPP)andCentralAmericanElectricalInterconnectionSystem(SIEPAC).Regionalmarketsconnectelectricitysystemsacrossnationalborderstoenableelectricitytradeandthesharingofreserves,allowingsmootherintegrationoflargersharesofvariablerenewableenergysourcesandquickeradoptionofnewtechnologies.ThisprimerwillbefollowedbyaseriesofknowledgenotesthatdelvedeeperintomorespecifictechnicalissuesofinteresttoWorldBankstaffandstakeholdersinclientcountriesincludingregulators,systemoperators,ministries,andutilities.ThespecifictopicsofthesepaperswillbeselectedbasedonfeedbackfromWorldBankstaffandclientorganizations,buttheyareexpectedtocovertheroleofmarketsinthetransitiontowarddecarbonizedandgreensystemsofthefuture,andtoincludegoodpracticenotesonfacilitatingnewtechnologiesandenablingflexibleelectricitygridsthroughnewmarketinstruments,transmissioninterconnectivity,regionaltradeandmarkets,andlegacyandcontractualsolutions.viiiACKNOWLEDGEMENTSAcknowledgementsThisprimerwaspreparedbytheEnergySectorManagementAssistanceProgram(ESMAP)andtheGlobalKnowledgeUnitintheEnergyandExtractivesGlobalPracticeoftheWorldBank.ItisauthoredbyMichaelKlein,SeniorAdjunctProfessorofEconomicsattheJohnsHopkinsSchoolofAdvancedInternationalStudiesandformerWorldBankGroupVice-PresidentforFinancialandPrivateSectorDevelopment,actingasaconsultanttoESMAP;withcontributionsfromandtheoverallsupervisionofDebChattopadhyay,MirlanAldayarov,TatyanaKramskaya,andLilianaDragulescu-Benitez(alloftheWorldBank).ThepaperbenefittedfromreviewandinputbyVivienFoster,HusamBeides,GailiusDraugelis,TendaiGregan,TonciBakovic,andLuizMaurer.OverallguidancewasprovidedbyGabrielaElizondoAzuela(PracticeManager,ESMAP),andAniBalabanyan(PracticeManager,GlobalKnowledgeUnit).WHOLESALEELECTRICITYMARKETDESIGNixAbbreviationsACalternatingcurrentBESbatteryenergystorageCfDContractsforDifferenceCOMELECComitéMaghrébindel’ElectricitéDCdirectcurrentDERdistributedenergyresourcesDPODevelopmentPolicyOperationsEEXEuropeanEnergyExchangeEMLElectricityMarketLawEMRAEnergyMarketRegulatoryAuthorityGWhgigawatt-hourERCEnergyRegulatoryCommissionFTRfinancialtransmissionrightsIPPindependentpowerproducerskWhkilowatt-hourMWhmegawatt-hourISOsindependentsystemoperatorsLCOElevelizedcostofelectricityO&MoperationandmaintenanceOTCoverthecounterPPApowerpurchaseagreementsPURPAPublicUtilityRegulatoryPoliciesActRGGIRegionalGreenhouseGasInitiativeSAPPSouthernAfricanPowerPoolSIEPACCentralAmericanElectricalInterconnectionSystemSOsystemoperatorSOEstate-ownedentityT&DtransmissionanddistributionVREvariablerenewableenergyWAPPWestAfricanPowerPoolWPTwillingnesstopayAllcurrencyisinUnitedStatesdollars(US$,USD),unlessotherwiseindicated.xKEYFINDINGSExecutiveSummaryBarelythreedecadesago,itbecamefeasibletointroduceadvanced,bid-basedelectricitymarketscompatiblewiththephysicaloperationofapowersystem.Today,around60countrieshavepowersystemswithcompetitivecost-orbid-basedwholesalemarkets.TheseincludemostcountriesintheAmericas,Europe,andOceania(exceptsmallislandeconomies),aswellasagrowingnumberofcountriesinAsiaincludingIndia,Japan,thePhilippines,Singapore,andSouthKorea.Chinaisexperimentingwithcompetitivewholesalemarketsinseveralprovinces.Severalotherdevelopingcountriesareexploringwhetherandhowtomovetowholesalemarketsintheirpowersystems.Interestincreatingelectricitymarketsalsoarisesfromtheexamplesofferedbypowerpoolsthatinterconnectelectricitysystemsacrossborderstoenableelectricitytradeandthesharingofreserves,includingseveralrelativelyadvancedregionalmarketsliketheSouthernAfricanPowerPool(SAPP)andCentralAmericanElectricalInterconnectionSystem(SIEPAC).Ithasbecomecommontoclassifythestructureofelectricitysystemsbasedontheextentandtypeofcompetitionthattheyfeature(See,forexample,Hunt2002):•Verticallyintegratedmonopoly:Systemsrunbyasinglemonopoly.•Singlebuyer:Systemswherebymonopolisticcompaniescarryingouttransmissionanddistribution(andoftensomegeneration)buysomeorallelectricityfromgenerators.Thisiscompetitivelyprocuredunderlong-termpowerpurchaseagreements(PPA),aformofcompetition“forthemarket.”•“Wholesaleandretailcompetition:Systemswhereby“merchant”generatorscompetewithoneanotheronanongoingbasis(head-to-head)forsalestodistributioncompaniesandotherusers,aformofcompetition“inthemarket.”Underwholesalecompetition,onlylargecustomersbuyfromthemarket.Underretailcompetition,allcustomershaveachoiceofretailersorsupplierstobuyfrom.Retailers,inturn,aggregatethedemandoftheircustomersandbuy“inbulk”atthewholesalelevel.iThisprimerfocusesoncompetitioninthemarket:thecreationofcompetitivemarketsforelectricitygeneration.Assuch,itsummarizesanumberofwell-understoodsectorreformsneededtoembedcompetitivemarketsinelectricitysystems.Itthenexplainsthatputtingtheplayersinplace,byunbundlingmonopoliesforexample,isjustthebeginningofreform.Laissez-fairapproachesdonotworkforelectricitymarkets.Theyrequiremarketdesign,carefullycraftedforeachsystemtomeetawiderangeofobjectivesthatgobeyondcostreduction.Thisprimersuggestswaystothinkaboutdesigningcompetitiveelectricitymarkets.Itdoesnotprovide“recipes,”butlaysoutdesignprinciplesandseveralkeymarketdesigndebates.WHOLESALEELECTRICITYMARKETDESIGNxiTheprimerismeanttobeaprimerofsorts,supportingpolicymakerscontemplatingmarketreform,aswellastheiradvisors,bypresentingthedebatesaboutmarketdesigninnontechnicallanguage.Theprimerstartswithabriefoverviewoftheevolutionofcompetitivepowermarketsandthecurrentgloballandscapeofelectricitymarkets.Itfurtherreviewstheargumentsformarkets,includingexistingevidenceaswellasbasicpreconditionsformarketreform.Themainbodyofthereportthenwalksthroughkeymarketstructuringanddesignissues,includingconsiderationstoaddressdecarbonizationobjectives.Topicsaddressedincludethepromisesandchallengesposedbytheintegrationofvariablerenewableenergyandnewtechnologicalsolutionssuchasbatteryenergystorage(BES)anddistributedenergyresources(DER).Thereportconcludeswithabriefcharacterizationofkeymarketdesignchoicesandagenericlistofprocessstepsrequiredformarketreform.ONETHEEVOLUTIONANDCURRENTSTATEOFPOWERMARKETSOLIVERKNIGHT/WORLDBANKWHOLESALEELECTRICITYMARKETDESIGN1Electricpowersystemsemergedinthesecondhalfofthe19thcenturyandweretypicallyownedbyprivateinvestors,wheregenerationhadtobeclosetothelocationofconsumption(KleinandRoger1994).Differentusesofelectricity(e.g.,streetcarsorlighting)requireddifferentvoltagesandseparatelines.Themarketstructurewascomposedofdistributedgenerationandminigrids,mainlyusingdirectcurrent(DC).Integrated,state-ownedmonopolycompaniesbecametheorganizationofchoicebythemid-20thcentury.Alternatingcurrent(AC)madelong-distancetransport(high-voltagetransmission)advantageous,allowingeconomiesofscaleforgenerationplantsandtradeamongdeficitandsurplusareas.Largersystemsweredevelopedatthemunicipal,regional,andnationallevels.Themonopoliesperformedallfunctions,includinggeneration,transmission,anddistribution.Powermonopoliesunderpinnedtheunprecedentedeconomicgrowthofthesecondhalfofthe20thcentury,althoughperformancewasuneven.Inmoreadvancedeconomies,monopolyutilitiesusuallydeliveredpowertocitizensatahighcostduetothelackofincentivestooperateandinvestefficiently(JoskowandSchmalensee1983).Indevelopingeconomies,manypowercompaniesfailedtoprovideaccessandqualityofsupply.Theyoperatedunreliably(Huenteleretal.2017),primarilyduetoalackofmanagerialaccountability,outdatedinfrastructure,operationalinefficiencies(poorcollectionratesandhighratesoftechnicalandcommerciallosses),and,mostimportantly,end-usertariffsbeingsetbelowcost-recoverylevels.Issuessuchasinefficientplanning,operations,andinvestmentplaguedmanymonopolies(WorldBank1994).Arecentreviewfindsthatinmanycases,suchproblemspersist,notleastduetopoliticizedgovernance(WorldBank2019).Governmentsbegantointroducecompetitioninelectricitysystemsduetovariousproblemsrelatedtospecificcountrycontexts.Theseincluded:(1)inefficienciesininvestmentresultinginover-orundersupply;(2)highoperatingorinvestmentcosts;(3)poorbillingandcollection;(4)pressureonthefiscalsystemresultinginadrainonpublicfinances;and(5)aneedtoattractprivatefinance.Furthermore,theincumbentmonopolymaynotadoptimprovedtechnologiesadequately,includingthoserequiredtoaddressgreenhousegasemissions.Market-orientedreformsoughttoaddressmultipleproblemsintheelectricitysystem.Inprinciple,anefficientelectricitymarketcandeliverthesameorbetterqualityandreliabilityofsupplyasahighlycommercialized,state-ownedenterprise(SOE),butwithlesscommitmentofpublicfunds.Ifproperlyregulatedandincentivized,privatemarketparticipantsmaybestricterinallocatingcapital,managingconstructioncosts,andcoordinatingoperationandmaintenance(O&M)costsoverthelifecycleofanassetthanthepublicsector.PrivatemarketparticipantsmightalsobebetterabletomanagerisksorpushbackagainstpoliticalpressuresthanaSOEwithweakgovernance.Relevantreformeffortscanalsofacilitateasystematicanalysisofproblemsandforcepolicymakerstoconfrontcoreissues.Thesearchforcompetitivemarketsmaymotivatereformandforcepolicymakerstoaddressbasicproblems.Yet,marketspersewillnotmiraculouslycreatepaymentdisciplineorattractmorefinancing.So,whatcanoneexpectfromtheintroductionofwholesaleTHEEVOLUTIONANDCURRENTSTATEOFPOWERMARKETS2competition?Whatcancompetitionachievethatmonopoliescannot,evenwhenequippedwithstate-of-the-artoptimizationmodelstoguideoperationandinvestmentdecisions?Departmentsinregulatedorstate-runmonopoliesmayhaveweakincentivestoperformortoreducecosts.1Relevantinformationmaybehiddenorunavailable.Forexample,monopoliesalltoooftenlackbasicinformationabouttheircoststructure,neededtomakeefficientdecisions.Costlylegacyplantsmayhavestrong,in-housesupportinthefaceofnew,moreefficientoptions.Furthermore,regulatingmonopoliesrequiresanestablishedandstrongregulatorycapacitythatmaynotexist.Introducingwholesalecompetitionthusholdsthreemainpromises.Itcan:•Providegreaterincentivesforgeneratorsandsupplierstoperform(e.g.,tobeavailablefordispatchorcutcosts)•Providegreaterincentivestorevealinformationaboutthebestoperatingandinvestmentoptions,ensuringgreatertransparencyoftheoverallsector•Facilitateentryofnew,moreefficientplantsandmarketparticipants-Creatingelectricitymarketscanbeseenascomplex.Arguablyitis,however,nomorecomplexthanrunninganelectricitysystemasefficientlyaspossibleundermonopolyprovision.Inasense,modernelectricitymarketstakeinsightsintotheefficientpricingofelectricityseriouslybyprovidingbetterincentivestooperateandinvestefficiently.Marketreformsoriginatedinthe1970sand1980s,whenpolicyandintellectualfermentpavedthewayfortheintroductionofmarketforcesinelectricitysystems.IntheUnitedStates,the1973oilcrisissetlegislativeeffortsinmotion,culminatinginthe1978PublicUtilityRegulatoryPoliciesAct(PURPA).Thelegislationwasintendedtoreducedependenceonoilandgas.Oneofitsmajoreffectswasthatelectricutilitieswereobligedtopurchasepowerfromindependentpowerproducers(IPPs)thatcouldgenerateelectricityforlessthanthealternativecostoftheutility’straditionalgenerationsource:its“avoidedcost”oropportunitycost.Theresult:duringthe1980s,awaveoflong-termpowerpurchaseagreements(PPAs)enabledIPPstocompetefortherighttodelivertomonopolyutilities—aformofcompetitionforthemarketinthegenerationsegment.2MarketreformsindevelopingcountriesstartedinChile.Thecountryintroducedcompetitioninthemarketforpowerinthelate1970s,motivatedbytheneedtorestorefinancialcapabilitiesandreduceconcentrationandverticalintegrationinthesector,dominatedbytheSpanishEndesa.Generation,transmission,anddistributionwereunbundled.Transmissionsystemownershipwasdiversified,andgeneratorswereaffordednondiscriminatoryaccesstothetransmissionsystem.Deregulatedconsumers(largeuserswithdemandgreaterthan1megawatt[MW]),couldnegotiatecontractsfreelywithgeneratorsordistributioncompanies,whileregulatedconsumerscontinuedtobeservedbydistributioncompanies.Pass–throughtofinalusershadanadministrativelysetceiling(nodeprice)asincentiveforefficiencyincontractingdecisions.In1982,thenewmarketstartedtooperate.Contractualcoverageofdemandwasmandatory,andthespotmarketwasbasicallyaforumtoallowsettlementsamonggenerators.WHOLESALEELECTRICITYMARKETDESIGN3ExperimentswithnewelectricitymarketscontinuedinPeru,Colombia,Argentina,andBrazilinthe1990s.Box1.1showsabriefdescriptionofthemarketreformsinPeruandColombia.Marketreformsalsoadvancedindevelopedcountries,includingAustralia,NewZealand,Singapore,andseveralotherEuropeancountries.3In2000–01,theCaliforniaenergycrisistriggeredbydroughtandgassupplyconstraintsrevealedsomeofthechallengesofmarketreforms.Thewholesalemarketpricesspiked,andgeneratingcompanieswereaccusedofwithholdingcapacitytoexercisemarketpower.Utilitieswentbankrupt.Whenthedustsettled,itbecameclearthatbasicdesignmistakeshadbeenmade.Notably,utilitiesbuyinginthewholesalemarketcouldnotpassonscarcitypricestoconsumersduetoalowpricecapforfinalcustomers,andmarketparticipantswerenotallowedtohedgetheirexposure—hencethebankruptcies.Thesystemwasreregulated(Hunt2002),andtheenthusiasmformarketswanedintheaftermathofthecollapseofCalifornia’selectricitymarket.Ifthebestandthebrightestinoneoftheworld’smostadvancedeconomiescouldnotmakeelectricitymarketswork,thenwhyeventry?CountriessuchasKorea,Malaysia,andThailandsuspendedtheirreformefforts.Astechnologicaldevelopmentsfacilitatedtheintroductionofmoreefficientmarketinstruments,andmarketsdeliveredlong-anticipatedefficiencygainsindevelopedsystems,reformeffortsonceagaingatheredsteam.Californiaresumeditsmarketreform.CountriesalloverEuropeandinpartsofAsiaproceededwithprocompetitivepolicyreforms.Forexample,thePhilippinesestablishedafull-fledgedpowermarketwiththespotmarketoperatingby2006(RudnickandVelásquez2019a).Indiasetuptwopowerexchangesforshort-termcontractsin2008,includingaday-aheadmarketand,mostrecently,areal-timespotmarketin2020(Tawde2020).Chinaestablishedabroadpolicydirectiontowardcompetitivemarketsin2015,withexperimentsinseveralprovinces(Pollitt2020).Kazakhstanintroducedacapacitymarketin2019,complementingtheexistingenergyspotmarket.TheAfricancontinentstandsoutfromtherestoftheworldinitsstruggletodeveloppowermarkets,withnosinglecountryfullyimplementingawholesalepowermarketandonlytwocountries(NigeriaandUganda)followingaround80percentoftheprescribed“model”(FosterandRana2019).Severalregionsstartedpracticallyexperimentingwithregionalelectricitymarkets:theSouthernAfricanPowerPoolcountrieshavehadanoperational,day-aheadmarketsince2015,anintradaymarketsince2017,andarecurrentlyintroducingabalancingmarket.Overall,upper-middle-incomecountriesandthosewithlargeinstalledgenerationcapacity(above5gigawatts[GW])weremuchmorelikelytohaveimplementedatleastpartialverticalunbundlingthanlow-incomecountries.Currently,manydevelopingcountrieshaveunbundledtheirpowersectorstosomedegree,asshowninfigure1.1.Theintroductionofmarketmechanismshaschangedthelandscapeofelectricitysystemsacrosstheworld,andarangeofstructureshaveevolvedindifferentcountries.In1990,mostelectricitysystemswereorganizedasstate-owned,verticallyintegratedmonopolies;by2020thepicturehadchangedfundamentally.Figure1.2summarizestheintroductionofwholesaleelectricitymarketsovertheyears.THEEVOLUTIONANDCURRENTSTATEOFPOWERMARKETS4MARKETREFORMINPERUANDCOLOMBIAThePeruvianpowermarketwasestablishedin1992,andhasbeencontinuouslyadaptedtofulfilldifferentgovernmentobjectives.ThePeruviangovernmentimprovedthesecurityofthepowersupplybydiversifyingpowerproductionawayfromhydropowertowardgas-firedgeneration(RudnickandVelásquez2019c).Thepowermarketiscomposedmainlyofbilateralcontractsandaspot,cost-basedpowerpool.Marketconcentrationhasfallensteadilyduetoincreasedcompetition.Rapidcapacityadditionsandsluggishdemandgrowthoverrecentyearshavecontributedtodepressedwholesaleandcontractprices.Morerecently,thecountrypushedforinvestmentinrenewableenergiesthroughcompetitiveauctions,achievingmodestbutincreasinglevelsofrenewablegeneration.Movingforward,asidentifiedbyWolak(2021a),thereisasignificantneedtoenhancetheregulatoryoversightofPeru’selectricitysupply.Establishingastakeholderprocessfordevelopingandadaptingmarketrules,andestablishingaformalmarketmonitoringprocess,willreducethescopeforcostlypoliticalinterventioninthemarket.Meanwhile,theColombianpowermarketwasestablishedin1995,drivenbyconcernsaboutthereliabilityofsupplyinthecountry’slargelyhydropower-baseddomesticpowersystemandtoensuresupplyduringtighthydrologicalconditionsaffectedbytheElNiñophenomenon(RudnickandVelásquez2019b).Despiteinitialenthusiasm,themarkethaddifficultydeliveringintendedoutcomesduetodesignandinstitutionalissues,andmultiplestructuralweaknesses.Thegovernmenthasintervenedinthemarketduringcriticalsituations,andconcernspersistregardingtheexerciseofmarketpower,asteadyincreaseofcontractprices,anddysfunctionalitiesinreliabilitycharges.BOX1.1TIRC83/ISTOCK/GETTYIMAGESPLUSWHOLESALEELECTRICITYMARKETDESIGN5FullyverticallyandhorizontallyunbundledFullyverticallyunbundledPartiallyverticallyunbundledVerticallyintegrated0%20%40%60%10%30%50%70%80%90%100%19951996199719981999200020012002200320042005200620072008200920102011201220132014201590%76%67%63%57%11%14%18%16%13%9%8%14%11%10%7%7%7%1%2%FIGURE1.1PercentageofDevelopingCountriesAdoptingSomeDegreeofUnbundlingOverTimeSource:Fosteretal.2017.0102030405060700123456781989199119931995199719992001200320052007200920112013201520172019CumulativenumberofcountriesNumberofcountriesthatintroducedwholesaleelectricitymarket#ofCountriesinYearCumulativeFIGURE1.2IntroductionofWholesaleElectricityMarketsSource:AkcuraandMutambatsere.GlobalMarketStructureDatabase.IFC.Forthcoming.THEEVOLUTIONANDCURRENTSTATEOFPOWERMARKETS6BasedonInternationalFinanceCorporation(IFC2020)data,verticallyintegratedmonopoliesaremostlyfoundinlow-incomedevelopingcountriesorsmalleconomies(seefigure1.3).Stateownershipinsuchmonopoliesisfoundin81countriesandterritories,mostofthemsmallislandeconomies,severalcountriesinSub-SaharanAfrica,plusafewothers.Privatemonopoliesoperatein18economies.In75countries,themonopolyutilitiesentertainadegreeofcompetitionforthemarketbybuyingenergyfromprivategeneratorsunderlong-termPPAs(inasingle-buyermodel).SuchsystemsaccountfortherestofSub-SaharanAfricaandtheMiddleEast,someislandeconomies,andmuchofAsia.Someformofcompetitioninthemarketisfoundin56countries:mostoftheAmericas,Europe,Australia,NewZealand,andafewAsiancountriessuchasIndia,Japan,thePhilippines,Singapore,andKorea.4Itshouldbenotedthattheformalsystemstructureslaidoutabovedonottellthewholestoryabouthowelectricityprovisionfunctionsinpoorercountriesandfragilestates.5Theremaybesignificantalternativesourcesofpoweroutsidetheofficialsystem.Forinstance:•Inmanysystems,customers—whethertheybelargefirmsorhouseholds—mayhavetheoptiontopossesstheirownstandbygenerationequipment.Insystemsthatfailtoconnectmanycustomersorareplaguedbyserviceinterruption(loadshedding)orfullblackoutsandpossiblyexcessivevoltageandfrequencyfluctuations,standbygenerationmaybethemostimportantsourceofpower.InNigeria,forexample,itisestimated132Note:1=verticallyintegratedmonopolies;2=single-buyermarketmodels;3=wholesalemarkets.Source:AkcuraandMutambatsere.GlobalMarketStructureDatabase.IFC.Forthcoming.FIGURE1.3StatusofGlobalElectricityMarketsin2020WHOLESALEELECTRICITYMARKETDESIGN7thatprivate,captivegenerationcapacityof14–20GWservessome100millionpeople,significantlyexceedingtheofficialcapacityofthesystem(12.5GW),ofwhichmorethanhalfisusuallynotavailable(Ferrero2018).InIndia,captivepowergenerationofsome78GWaccountsforasizeablechunkofgenerationcapacity,significantlyexceedingthe5–6GWtypicallytradedinthecountry’swholesalemarkets.•Somelow-andmiddle-incomecountries—oftenfragilestates—haveoff-gridelectricitysystemsthatsupplygroupsofhouseholds,entirevillages,orpartsoftowns.Onestudy(KariukiandSchwartz2005)foundthatintheearly2000s,about7,000smallelectricitysystemsexistedin32countries.Thisislikelytobeanunderestimateofthetotal(KariukiandSchwartz2005).Inrecentyears,morecountrieshaveallowedoff-systemminigridstodevelop,usuallyinareasthatthemaingridhasnotyetreached.Theinterestinrenewableenergyhasinpartunderpinnedsuchpolicies.Consideringtheserealities,manycountriesthathaveheldontoverticallyintegratedmonopolieshavelaissez-fairesystems,relyingonmarketforcesoutsideofficialintegratedACtransmissionsystems.TWOWHYMARKETREFORM?OLIVERKNIGHT/WORLDBANKWHOLESALEELECTRICITYMARKETDESIGN9EvidenceonthePerformanceofSystemswithCompetitionintheMarketCompetitionintheelectricitymarketwasanentirelyunprovenconceptjust40yearsago.Manyarguedthatthelightswouldgooutifoneintroducedcompetingplayersintoelectricitysystems,whichneedtoberunasonemachine.Theevidencenowclearlyshowsthatitistechnicallyfeasibletointroduceavarietyofformsofcompetitioningeneration.Thelargereconomieshavemostlyembracedsometypeofcompetitioninthemarketoraremovingtodoso.Marketstructurechoicesarewellunderstood.Empiricalevidenceshowsthatcompetitionimprovesday-to-dayoperationalefficiency.Kessides(2004)surveysevidenceforemergingmarkets,includingsomespectacularimprovementsinArgentinaafterreformsin1992,astheunavailabilityofpowerplantsdroppedoverallfromover50percentto26percent.FortheUnitedStates,BushnellandWolfram(2005)aswellasMansurandWhite(2007)provideevidencethatsystematicefficiencyimprovementsinoperationsclearlyexceedimplementationcosts.Themostrobustbenefitfromcompetitionappearstobereducedfrequencyanddurationofoutages,resultinginhighercapacityutilizationandhighertotaloutputperplant(DavisandWolfram2012,citedinIEA2016).Marketshavealsofacilitatedtheentryofmoreefficientplantsinseveralregions,notablysubstitutinggasforcoal—asinthe“dashforgas”thatfollowedtheintroductionofcompetitioninEnglandandWales.Thisbecomesausefulfeatureasvariablerenewableenergy(VRE)generationtechnologiesgraduallybecomemoreefficient.Qualityofserviceandaccesswereimproved,butwithwidevariationacrosscountries.Jamasbetal.(2014)andBacon(2018)surveyedtheliteratureonpowersectorreformexperiencesacrosstheworld.Theyfoundnoclearpatternofimpactonprices,althoughefficiencyandproductivityincreaseswerewidespread,suggestingthatoverallnetbenefitsfrommarketsarepositive.Thesurveysmakeitclearthatpolicyapproachesadjusttosectorandcountrycontexts,anditishardtoseparatetheeffectsofintroducingcompetitioninthemarketfromotherreformfeaturessuchasownershipchangeorchangesinprovisionofgovernmentsubsidies.6Itisalsoclearthatmarketsystemscanaddresspolicyconcernsaboutaccess,affordability,anddecarbonizationwithgreaterefficiencyandmoreflexibility.Onthebalance,thereisnoargumentthatcompetitioninthemarketisworsethanmonopolyprovision.Cleargainsarefoundintheoperatingperformanceofgeneratorsthatexceedthecostsofintroducingmarkets.Competitivemarketsholdthepromiseofbeingmuchmoreflexibleinenablingfasteradoptionofnewtechnologiesandbusinessmodelsthanundertheruleofmonopolies,especiallyincountrieswithlimitedcapacitytoregulate.Asintermittentrenewables,batteries,andnewtypesofdemand(e.g.,electricvehicles)reshapeelectricitysystems,morecomplexincentiveproblemsforgenerationandconsumptionneedtobesolved.Marketsholdthepromisetodothismoreeffectivelythanregulatoryintervention.WHYMARKETREFORM?10PreconditionsofSuccessfulMarketReformWhilethereisoverallempiricalevidenceofthepositiveeffectsofcompetitivemarkets,specificresultsvarysignificantlyamongcountries.Far-sightedgovernmentsarecontinuingtofine-tunemarketdesigns,deployinginnovativesolutionsandpreparingtheirsystemsforimminentenergysectortransformation.Whilethisexperimentationisongoing,thebasicmarketdesignelementsareclear.Substantialexperiencehasbeengainedandlessonslearnedonhowtoavoidseriousdesignmistakes(e.g.,Californiain2000–01).Manydevelopingcountriesarestillatthebeginningofexploringthetransitiontowardcompetitivemarkets,butreformprocessescanbepoliticallychallengingunlesscertainprovisionsthatfacilitatesuccessfulmarketreformaremet.TheWorldBank’sreport“RethinkingPowerSectorReform”(FosterandRana2020)setsoutfourbasicsetsofconditionsfortheproperoperationofanypowersystem,butespeciallyifcompetitivemarketreformisbeingcontemplated:•Adequaterevenueiscriticalforoperationsandinvestmentinanypowersystem.Thatmeanstariffsand/orsubsidiesmustcoverallcosts,andbasicpaymentdisciplinewithproperenforcementneedstobeinplace.Wheneffectivetariffsareadequate,thedistributionsegmentofthesystemissolvent.Competitioninpowergenerationmakesthemcomfortablethattheywillreceivepaymentfromdistributors.Privatizationofdistributioncanfurtherhelpstrengthencommitmenttoadequate,effectivetarifflevels.•Asoundcontractingandregulatoryenvironment(includingenforcementanddisputeresolution)supportstheefficientoperationofanypowersystem.Insystemswithsomeformofunbundling,theformalcontractingsystemisofparticularrelevance.Integratedmonopoliesinamarketsystemneedtohavesoundcorporategovernancemechanisms.Allsystemshaveelementsthatrequirepriceandqualityregulation.Soundregulatorymechanismsarethusrequiredwhethertheyarepartoftheexecutivebranch,managedbyso-calledindependentregulatoryagencies,orwhetherregulationsareembeddedincontractswithultimaterecoursethroughthecourtsystem.•Broadercountryenvironmentaffectswillingnessandabilitytoinvestandoperate.Attheextreme,acivilwarisclearlydetrimentaltoanytypeofpowersystem.Moregenerallyunreliablepropertyrights,forexample,orerraticcontractenforcementsystems,hampertheabilitytointroducecompetitivemarkets.Significantmacroeconomicinstabilitymayalsoplayhavocwithanysystem.•Theintroductionofmarketcompetitioninpowersystemsrequiresaminimumsystemsizetoallowasignificantnumberofplayersforeffectivecompetition.Asaruleofthumb,systemsshouldfeatureatleast1GWofcapacityandatleastfoureffectivecompetitorsofsimilarsizeandtechnology,unprotectedbyexcessivetransmissionconstraints.7ThismeansmarketreformismostlikelytobebeneficialnotonlyinlargecountrieslikeChinaorIndia,butalsoinmidsizedsystemsorinregionalpowerpoolsthatmanageelectricitytradebetweencountries.Acrossdevelopingeconomies,systematicdifferencescanbeobservedintheuptakeofreforms.Preconditionshaveplayedaroleinshapingtheoutcomeofreforms.Table2.1summarizesthepreconditionsinasampleofcountriesatthetimeofareform(FosterandRana2020).WHOLESALEELECTRICITYMARKETDESIGN11TABLE2.1OverviewofPreconditionsamongGroupsofCountriesattheTimeofaReformSECTORPRECONDITIONSCOUNTRYPRECONDITIONSCOSTOFELECTRICITY($/kWh)FULLCOSTRECOVERY(%)SYSTEMLOSSES(%)ACCESSTOELECTRICITY(%)ELECTRICITYCONSUMPTION(KWHpcpa)SYSTEMSIZE(GW)INCOMELEVEL(GDPpc)QUALITYOFGOVERNANCE(INDEX)ComprehensivereformersStrongerperformers0.156919821,413201,405−0.43Weakerperformers0.1770305331515756−0.49LimitedreformersStrongerperformers0.1355217780422731−0.55Weakerperformers0.238427271722428−0.40Note:GDP=grossdomesticproduct;GW=gigawatt;kWh=kilowatt-hour;pc=percapita;pa=perannumSource:FosterandRana2020.Alloftheseprovisionsmatter.Thefirstthreesetsofpreconditionsmatterforimprovingtheoperationsofanysystems,beitintegratedmonopoliesorcompetitivemarkets.Thechallengeistoassesswhetheracountryisreadyformarketreform.Thekeyistojudge—countrybycountry—whatisbothtechnicallysoundandcanbesupportedandsustainedbytheforcesofpolitics.8Forexample:•Nigeriashowsthatunbundlinggeneration,transmission,anddistributioninasystemlargerthan1GWneednotworkoutanybetterthantheintegratedmonopolyintheabsenceofgovernmentabilitytosortoutbasicservicedeliveryandpaymentdisciplineproblems.TheNigerianexperienceillustratesthefutilityofunbundlinginasectorwithoutaddressingotherfundamentaloperatingconditions.Hugetechnicalandcommerciallosses(inexcessof50percentofenergysupplied)inelectricitydistributionhaveledtochronicpaymentproblemsalongtheelectricitysupplychain,andcreatedafinancialdeficitintheorderofUS$1billionannually.Theresultingunwillingnessofgeneratorstoproduceelectricityandgassupplierstofurnishfuelhasledtocripplingpoweroutages,despitethefactthataroundhalfthecountry’sgenerationcapacityisparadoxicallylyingidle(Glachant,Joskow,andPollitt2021).•Boliviashowsthatbasicmarketsmaybepossibleatasmallersystemsizethan1,000MW.Acost-basedpowerpoolwasintroducedin1994whenthesystemsizewasonly400MW.WHYMARKETREFORM?12Thecapacityofeachgeneratingcompanywasnottoexceed25percentofthetotalsystemcapacity.•Indiashowsthatpowermarketscandevelopinsystemswithsignificantpaymentproblemsandheterogeneousregulatoryrules.TheElectricityActof2003pavedthewayforreform.Stepbystep,problemshavebeentackled,ifnotfullysolved.Market-basedtradingmechanismswereintroducedbypowerexchangesin2008.Theinterestinimprovingtradeamongstateelectricitysystemshasevolvedtowardamoreefficient,real-timebalancingmarket,putinplaceinmid-2020.OLIVERKNIGHT/WORLDBANKKEYELEMENTSOFMARKETSTRUCTURE14THREEKEYELEMENTSOFMARKETSTRUCTUREOLIVERKNIGHT/WORLDBANKWHOLESALEELECTRICITYMARKETDESIGN15Modern,interconnectedelectricitysystemsallowcompetitioninthemarketwhenfundamentalpublicpoliciesareinplace.Thisincludesanenablingmarketstructure;regulationofsystemelementsthatremainnaturalmonopolies(transmission,distribution,systemoperation);publicplanningmechanisms(e.g.,fortransmissionsystemexpansion);andgovernancemechanisms.Thissectiondiscussestheseelementsindetail.CreatingaCompetitivePlayingField:UnbundlingTherearetwokeytypesofplayersinacompetitiveelectricitymarket:generationplantsandtraders/suppliers.Generatorsownplantsthatproduceelectricity.Tradersbuyandsellelectricitywithoutnecessarilyowningplants.Acompetitivemarketrequiresmultiplegenerators,buyers,andtradersthatintermediatecontracts.Whengenerationcompaniescontrollargemarketshares,“horizontalunbundling”maybenecessarytocreateacriticalmassofcompetitorsandpreventreconcentrationviamergersandacquisitions.Forexample,acountrywithfiveorsixgenerationcompaniesofevensizeislikelytoexperiencestrongercompetitivepressureingenerationthanacountrywithonelargeandonesmallgenerationcompanyonly.Box3.1summarizesrelevantaspectsofVietnam’spowersectorreform.Whilecompetitionamonggeneratorsandtradersorsuppliersisfeasible,severalnaturalmonopolysegmentswillremainwithinanintegratedelectricitysystem,notablysystemsoperation,transmission,anddistribution.Tominimizeconflictsofinterest,itistypicallyrecommendedthatthedifferentsegmentsofapowersystembe“vertically”unbundled.9Forexample,asystemoperatorowninggenerationmaybeabletodiscriminateagainstcompetinggeneratorsbydelayingnewgenerationinterconnectionstudies,bynotfullyrevealinginformationregardingavailabletransmissioncapacity,and/orbytakingadvantageofcommercialinformationfromthird-partygeneratorstoensurepreferentialtreatmentforthesaleofitsownpower.Hence,thebasicrecommendationistoseparate(verticallyunbundle)thepotentiallycompetitiveelementsofthesystem(generationandtrading/sellingofelectricity)fromthenaturalmonopolyelements(transmission,distribution,andsystemoperation).Verticalunbundlingisprevalentinmostcountrieswithmaturedmarkets(theUS,Australia,mostofEuropeandLatinAmerica),whileveryfewdevelopingcountrieshaveunbundledtheirutilities.Instead,theyintroducedindependentpowerproducers(IPPs),alongwithmostlyverticallyintegratedutilities,whichhasledtocreationofSingleBuyerModelsand“hybridpowermarkets”(EberhardandGodinho2017;GratwickandEberhard2008;VagliasindiandBesant-Jones2013).WhilethismodelcreatessomespaceforIPPstoenterthemarket,italsointroducesrisksforfuturemarketdevelopmentwithrigidpowerdispatchingbasedoninflexibletake-or-payarrangementswithIPPs.KEYELEMENTSOFMARKETSTRUCTURE16VIETNAM’SPOWERSECTORREFORMToimprovetheefficiencyofthepowerandgassector,theGovernmentofVietnamadvancedreformstointroducecompetition.Electricityliberalizationstartedin2004withtheunbundlingofElectricityVietnam(EVN),theestablishmentofaregulator,andtheintroductionofacompetitivegenerationmarkettoensurethelong-termsustainabilityofpowersupplies.TheWorldBanksupportedpowersectorreformsinVietnamthroughaseriesofthreedevelopmentpolicyoperations(DPOs).Oneobjectiveoftheserieswastoincreasetheindependenceanddiversityofelectricitygenerators,creatingconditionsforeffectivecompetition.Thetargetwastoreducethemaximumproportionofgenerationownedbyasinglecompanyfrom70percentto45percent.TheDPOseries,however,onlyachievedamodestreductionof4percentagepoints(from70percentdownto66percent),reinforcingthatreducingtheownershipshareofstate-ownedutilitiesischallenging.TheDPOseriesdidachieveotherreformobjectives,suchasenhancedtransparencyingenerationcontractingandpricingandgreaterpredictabilityforinvestors.BOX3.1OLIVERKNIGHT/WORLDBANKWHOLESALEELECTRICITYMARKETDESIGN17Systemoperatorsthatphysicallyrunthesystemdaybydayshouldbeindependentofotherplayerstoenablefaircompetition.Thatalsogoesforthemarketoperatorsandsettlementadministratorsprovidingtheplatformfortrading.10SeveralpowercompaniesintheUnitedStates,forexample,arenotfullyunbundled,henceparticularimportanceisplacedoncreatingindependentsystemoperators(ISOs).Competitionlowerscostsandexcludestechnologiesthatareuneconomical.Thekeytocompetitioninthemarketisopennesstonewgeneratorswithlowercosts,whileallowingunderperforminggeneratorstoexitbeforetheendoftheiroperationallyusefullifeorthetermoftheoperatingpermit.Adecisiontoexitisbasedonwhetherthemarketwillproviderevenuessufficienttomeetthegenerators’operatingcostsgoingforward.Adecisiontoenterisenabledbyatransparentenvironmentthatallowsanyprojectortechnology(generation,storage,ordemandside)todemonstrateitsvaluetothecustomerbasedonthecombinationofvalue,capitalcosts,andrisks,whichcollectivelydeterminewhetheraprojectwillflourishorfail.Theownershipformofchoiceforsystemsegmentswithcompetitioninthemarketisprivateownership.Competitionmayalsoinvolvestate-ownedcompaniesbut,inpractice,state-ownedcompaniesmaynottrulycompetewithoneanother.Evenifallowed,theirincentivetoperformiseasilyunderminedbyanimplicitguaranteeoftheirfinancesbythegovernment:thatis,thetaxpayers.Asaresult,excessivelycostlystate-ownedgeneratorsmaybeinvestedinandoperated.Mostelectricitysystemswithcompetitioninthemarketfeatureprivatecompetitors,asdothosestillrelyingonthesingle-buyermodellikeEgyptandThailand,ormorecompetitiveoneslikethoseinLatinAmerica,Turkey,orIndia.LegacyIssuesSystemswhereprivateownershipofgenerationprevailsbeforetheintroductionofcompetitionmayalsocomplicatethetransitiontoamarket.Bothhorizontalandverticalunbundlingmaybehardasgovernmentsandregulatorsmaybereluctanttointerferewiththepropertyrightsofpreexistingprivateplayersintheelectricitysystem.Conflictsofinterestthenpersist.11Importantlegacyissuestoconsiderarestrandedcostsandlegacycontracts.StrandedCostsApracticalconcernwithintroducingcompetitivemarketstructuresisthetreatmentofso-calledstrandedcosts.Theterm“strandedcosts”characterizessituationswhereinvestorsareunabletorecoveralltheirfixedcostsandhavetowritedownequityorevenenterintobankruptcy—thatis,defaultoncreditors.Incompetitivemarkets,theexitofunderperformingfirmsisnormal.Freemarketentrymeanslittleifinefficientfirmsarenotallowedtofail.Investorstakinglossesdoesnotmeanfirmsclosedown.AslongasrevenuescovervariableKEYELEMENTSOFMARKETSTRUCTURE18costs,firmsshouldcontinuetooperate.Afterall,theirfixedcostshavealreadybeenincurred.However,priortothecreationofelectricitymarkets,theinvestmentsofgenerationcompaniesmighthavebeenapprovedbyregulatorsorsetbycontractsandtheirpricesallowedtorecovertheapprovedcosts,includingareturnoncapital.Whenthepolicyregimechangestoamarket,pricesmaydropduetogreaterincentivestooperateefficiently.Forexample,nuclearorcoalplantsmightbeintroubleandincurstrandedcosts,meaninginvestorswillnolongerbeabletoearntheirfull,expectedreturnonassets.Ifinvestorsdidnotmakeallowanceintheirprojectevaluationfortheriskofregimechangeandconsequentlosses,theymayclaimthatthechangeinpolicyregimeconstitutesaformofexpropriationbecausegeneratorscannolongerchargetheregulatedorcontractedpricesthattheywerepromised.Whilechangingapolicyisalegitimatefunctionofgovernment,investorsmayaskforcompensation.Differentjurisdictionstreattheclaimforcompensationdifferently.Italsomatters,forexample,whetherfirmsshouldhaveforeseentheintroductionofmarketspriortotheirinvestment.Morebroadly,governmentsaretypicallyallowedtointerferetosomedegreewiththefinancesofprivatefirms,forexampleviataxorotherpolicychanges,withoutthisresultinginvalidclaimsforcompensation.Howajurisdictiontreatstheissuemayaffectwhethernewinvestmentwillbeforthcomingandatwhatcost.Sometimesthenatureofcontractualremunerationisexplicitlyprovidedfor:forexample,incontractswithIPPs.Thisisanissueaffectingreformincountriesallovertheworldincluding,forexample,theDominicanRepublic,thePhilippines,andTurkey.“Legacy”investorsmayneedtobecompensated,ortheoldcontractualarrangements“grandfathered”intothenewsystemasvestingcontracts.LegacyContractsDependingonacountry’sstartingposition,inefficientlegacypaymentsmaycontinuetobebornebycustomers,andcontractsmaynotleadtofullyefficientdispatch.Nevertheless,efficiencycanbeenhancedoverall,astheoldcontractswouldhavebeeninforceanywayandwilleventuallyexpire.Thechallengeistodeterminewhatmarketrulesapplytogeneratorswithlegacycontracts.Possiblesolutionsdependontheparticulardesignofthenewpowermarket.Basicoptionsrangefrommandatinggeneratorsfullyparticipateinthemarket,tocompensatingthemwithafixedpayment.Thismightinclude,forexample,amonthlyamountoverthelifeoftheplant,orso-calledvestingcontracts—orcontractsfordifferences,CfDs—whichphaseouttheoriginalcontractualpaymentsovertimewhileexposingthegeneratormoreandmoretomarketforces.PowerpurchaseagreementswithIPPsmayintroducerigiditiesbystandinginthewayofreform(refertobox3.2).Itmay,forexample,becostlyfortheIPPtofulfilitscontractwhentheplantisnotavailableforsomereason.However,theintroductionofcompetitivespotmarketscanmakeiteasierforIPPstofulfiltheircontractbymakingupshortfallsthroughspotmarketpurchases.Theflexibilityofferedbymarketsmayfacilitateagreementsonwaystointroducecompetition.WHOLESALEELECTRICITYMARKETDESIGN19INDEPENDENTPOWERPRODUCERSContractswithindependentpowerproducers(IPP)mayhelpmakecompaniesorprojectsviableandhelpraisefinancefornewinvestments.Foraprojectwithostensiblyadequatetarifflevels,governmentsinfiscaldifficultymaybetemptedtodivertcashflowgeneratedbytheprojecttoplugunrelatedfiscalholesandthusreducethecompany’sabilitytopayitsfinanciers.Privatepropertyrightsprovideashieldagainstthistemptationtosomedegree,asgovernmentsmaybewaryofinterferingwithprivatepropertyrightsforfearofkillingoffprivateinvestmentmorebroadly(Klein2015).IPPsthatcombineinvestmentandoperationingenerationhavegainedinpopularity.UrpelainenandYang(2017)demonstratethatprovidingtheoptionforIPPshasraisedinvestmentinpowergenerationinemergingmarkets.TheWorldBank(2019)foundthatalittleover40percentofnewgenerationhasbeenprocuredasIPPsindevelopingeconomies.Inlow-incomecountriesthesharewasjustabitbelowthatofupper-middle-incomecountries.Closetothree-quartersofintermittentrenewablepowerplantshavebeenprocuredasIPPs.Detailedcost-benefitanalysiscomparingtheexperienceofIPPstotheperformanceofgenerationinmonopolysystemshardlyexists—notleastbecausemonopoliesoftendonothavedatathatallowtheperformanceoftheirgenerationassetstobeisolated.Forarelevantstudy,seeZhang(2018).IPPsaresometimesownedbygovernmentsfromotherjurisdictions.Thekeyiswhetherthedomesticorlocaltaxpayermustprovidesometypeofsubsidyincasecontractedservicesarenotpaidforasagreed.BOX3.2BORISBALABANOV/WORLDBANKKEYELEMENTSOFMARKETSTRUCTURE20NaturalMonopolySegmentswithinIntegratedSystemsThewire-basedtransmissionanddistributionsegmentsofelectricitysystemsarenaturalmonopolies,asisthefunctionofthesystemoperator.Anaturalmonopolymeansasinglefirmcanoperateatalowercostthanmultiplefirmsindeliveringthesameservice,orthatwhennumerousintegratedcompaniesenterthemarket,onlyonewillsurvive.Typically,naturalmonopolysegmentsinelectricitysystemsreceiverevenuefromregulatedpricesthatareperiodicallyresetbyaregulatorybody.Tosomedegree,competitionforthemarketcanhelpimprovetheefficiencyofwhateverpartofthesystemisrunasamonopoly.Whenthereiscompetitionforthemarketinmonopolysegments,forexampleintransmissionanddistribution,thegovernmentbidsouttherighttomanage,operate,and/orinvestinamonopolycompanyforaperiodoftime.Mostsuchcasesinvolvecontractingouttherunningofadistributioncompany.Transmissioncompanycontractsmayalsobecompetitivelyawardedtoprivatefirms,asinChileandinArgentinainthe1990sorintheUnitedStatessincetheearly2000s.Brazilprovidesanexampleofauctioningoffadditionstothetransmissionsystemtotheprivateprovidersbuildingandmaintainingthem(e.g.,PPIAF2017).Attheinitialstage,auctioningafranchiseallowsthechoiceofbestprovider.Atthesametime,competitivebiddingmaycreateincentivesforbidderstounderbid—eitherstrategicallytorenegotiatelateroncetheyhavewonthefranchise,orasaresultofthe“winner’scurse”:thepossibilitythatwinningbiddersarejustthemostoptimisticones.Forthearrangementtoworkwell,itisimportantthatcontractsarewelldesignedandsupervisedsothattheprovidercanbeheldtoitsoriginalpromises.Thequalityofsubsequentregulationalsomatters.Thisisparticularlytrueforfullconcessions,whereprovidersareresponsibleforbothoperationsandinvestment.Typically,changesindemandandcostconditionsrequirethataregulator,whetheranindependentagencyoraministry,resetconcessionterms(e.g.,tariffs)everyfewyears.Overall,contractingoutcompetitivelytocompetentprovidersrequiresadequategovernanceandcapacityinthecontractingagencyandtheregulatorsothatthewholearrangementdeliversonitspromise.Customerspayformonopolysegmentsofthesystemintheformofsomeregulatedchargeorlevy.Contractingoutmonopolysegmentsofelectricitysystemslikedistributiontothehighestbiddercanraiseproductivityandimprovequalityofservice—ifcontractsarewelldesignedandsupervisedandifregulationworksadequately(SchwartzandGuasch2013;Gassner,Popov,andPushak2009).Privatizeddistributioncompaniesaretypicallycharacterizedbycost-coveringtariffs.Privateownershipmayhaveinsulatedcompaniesfrompoliticalpressuretolowerprices,orprivateinvestorsmighthavesimplyboughtintocompanieswheregovernmentswerewillingtosetandenforcecost-coveringtariffs(WorldBank2019).Yet,well-run,state-ownedmonopoliescandojustaswell(WorldBank2019).Still,havingWHOLESALEELECTRICITYMARKETDESIGN21theoptiontocontractoutandtodosoattimesmayitselfstimulatestate-ownedfirmstoshapeupandimproveperformance.12OpenAccessOverall,competitionamongdistributionandtransmissioncompanieshasseenlimiteduptake.Inthe1990s,severalcountries,particularlyinLatinAmerica,awardeddistributioncompaniestoprivateconcessionaires.Yet,sincethe2000sfewcountrieshaveembarkedonnewconcessionsfordistributioncompanies.Transmissionhas,inmostcases,remainedstateowned(WorldBank2019).Acompetitivemarketrequiresnewandbetterserviceproviderstodeliverservicestocustomersandreplacelessefficientcompetitors.Thedeliveryofelectricityusuallyinvolvesusing“wires,”thatis,theelectricitygrid.Thegridisanaturalmonopolyandwhoevercontrolsit,mostlikelythesystemoperator,cangrantordenyaccesstoproviders.Hence,theimportanceof“openaccess”:nondiscriminatoryaccesstothegridbasedontherulesofthemarket,includingsystemsecurityconstraints.Suchnondiscriminatoryaccessismostbeneficial,orfull(ESMAP2013),whenthemarketrulesthemselvesareoptimal;lesssowhentherulesprovidespecialtreatment(e.g.,forinefficientlegacycontractsunderPPAs).Figure3.1illustratesapowersectorstructureallowingopenaccesstopowergrids.Makingfull,openaccessarealityisequivalenttostructuring,designing,andgoverningthebestpossiblemarket.Thisincludesminimizingconflictsofinterestforthosecontrollingaccesstothegrid.Essentialare,ofcourse,chargesthatpayforthegrid—typicallyregulatedfeesplussomecongestionrentsinthecaseofmarketswithnodalpricing.Expandingthegridtoprovideaccesstonewprovidersisanothertopicrequiringsoundsystemexpansionplanningthattrades-offthecostofgridexpansionagainstthecostofgeneration.Onefeatureofopenaccesssystemsistheabilityofatleastsomebuyersandsellerstoconcludecontractsfreely.Contractsmaybeforphysicaldeliveryorpurelyfinancialhedges.Asdiscussedinthesectiononsequencesofmarkets,suchcontractsarefundamentallyequivalentinanefficientmarketdesign.SystemPlanninginMarketSystemsElectricitymarketscombineoptimizationmodelswithmarketforces—whereconsumersandproducersexercisechoice.Optimizationmodelsandanalyticssupportbothday-to-daymanagementandplanninginthelongrun.KEYELEMENTSOFMARKETSTRUCTURE22Planner’stoolsforday-to-daymanagement:•Onecoreissueforelectricitymarketdesignismanagingimbalancesintheinterconnectedelectricitysystemsecondbysecond.Thereiscurrentlynopracticalwaybywhichentirelydecentralizedcontractingamongmarketparticipantsachievesanoutcomewheredemandmatchessupplybythesecondandthephysicalconstraintsofthetransmissionsystemarerespected,allwhilekeepingfrequencyandvoltagewithinverynarrowbands.13•Attheheartofelectricitysystemsarecomputerizedoptimizationmodels.Whenmarketsareintroduced,bidsbygeneratorsandcustomersinthewholesalemarketprovidetheinputvaluesforthemodels.Theoutputisasystemofpricesthatoptimizesdispatchinthesensethatthecheapestgeneratorsaredispatchedandtheconsumerswiththehighestwillingnesstopay(WTP)areserved.14ThistypeofTransmissionDistributionSupply(Trade)ConsumptionConsumersGenerationGeneratorsSystemOperatorWholesaleMarketOperatorTransmissionCompanyC=Consumption;D=Distribution;G=Generation;S=Supply(Trade);T=TransmissionFontcodingusedformarketlevels:BoldG,T,S,andD=WholesaleBoldItalicC=Contestableretail(openaccesseligible)PlainC=CaptiveretailGTSCCCCCCCCCDDDSSGGSource:ESMAP2013.FIGURE3.1AnExampleofaPowerSectorStructureAllowingOpenAccessWHOLESALEELECTRICITYMARKETDESIGN23market,assistedbyanoptimizationprogram,isoftencalledamarketclearingengineorsmartmarket.Planningforthelongruncentersontransmissionexpansion.Theshapeandbuild-outoftransmissionsystemsforelectricityrequirebasicplanningdecisions.Theseinteractwithdecisionsaboutgenerationinvestmentsintwoways:•First,generationandtransmissionarecomplements.Oneneedsbothtotransportandsellelectricity.Inmarkets,ideallythechoiceofoptimalsize,technology,andlocationforagenerationplantislefttomarketforces.Yet,thisalsodependsonplanningdecisionsabouttransmission.Marketswillonlyleadtooptimaloutcomesifparticipantscorrectlyanticipatehowtransmissionsystemswillbebuiltout.Thebestonemaybeabletodoisprovideindicativeplanningforthebuild-outofthetransmissionnetworkinconsultationwiththegenerationproviders.•Second,transmissionandgenerationarealsosubstitutes.Forexample,expandingatransmissionlinemayfacilitatebringinginmorepowerfromafarinsteadofbuildinganewpowerplantnearby.Tosomedegree,transmissioninvestmentisthusincompetitionwithgeneration.Yetgeneratorsgetpaidbypricessetinmarkets;transmissionassetsgetpaidforbypricessetbyregulators.15GovernanceArrangementsOverviewofGovernanceIssuesAnumberofgovernanceissuesneedtobesettledwhendesigningthefoundationsandoperationsofanelectricitymarket.Thebasicgovernancearrangementsforthefullarrayofplayersandrulesareusuallysetbylegislation.Regulatorybodiesandimplementationagenciesareneededtoimplementtherules.Regulatorsmayalsohavesomecircumscribedpowersofrulemakingtodealwithrequiredadjustmentstotherulesasunexpectedissuesinmarketdesignneedtobeaddressed.Limitedregulatoryfunctionsmaybeperformedbyplayerslikesystemoperators:forexample,thedeterminationofpricecapsforwholesalemarkets.Fiveimportantgovernanceissuesaredescribedbelow.BUILDINGBLOCKSOFMARKETSTRUCTURELegislationandregulationcreatethebuildingblocksofasystemfeaturingcompetitioninthemarket,notablytherelationshipofcompetitivesegments(generationandsupplyplusassociatedfinancialmarkets)withmonopolisticsegments(marketinfrastructure,transmission,anddistribution).Marketinfrastructureincludesthesystemoperatorthatisinchargeofdispatch,andthemarketoperatorthatrunsthemarketclearingengine.Aswithanymarket,contractualinfrastructureisrequired,includingdisputeresolutionmechanisms.Asettlementadministratorassurescorrectbillingandcollectioninthewholesalemarket.KEYELEMENTSOFMARKETSTRUCTURE24PRICEREGULATIONMonopolisticsegmentsrequiresomeformofpriceregulationtopreventabuseofpower.Competitivesegmentsmaybeplaguedbymarketpower.Hence,someformofmarketmonitoringtodetectabuseofmarketpoweriscalledfor,aswellasmechanismstopreventandpenalizeit.CONFLICTSOFINTERESTMechanismsarerequiredtoensurethatownersofmonopolisticsegmentsdonotdiscriminateagainstcertainplayersincompetitivesegments.Forexample,rulesareneededtoensurenondiscriminatoryaccesstotransmissionforgenerators.Mostimportantly,thesystemandmarketoperatorsshouldbefreefromconflictofinterest.Forexample,systemoperatorsshouldideallybeseparatefromotheractorsintheelectricitysystemtoensureimpartiality.16Theymayalsobebundledwithatransmissioncompanytominimizecoordinationproblems,whentransmissioncompaniesthemselvesdonotsufferfromconflictofinterest,forexample,duetoownershipofgenerationcompaniesunderasingleholding.SYSTEMMANAGEMENTPROTOCOLSThesystemoperatordispatchesbasedonmarketsignals.Atthesametime,systemmanagementprotocolsarerequiredtobalancethesystemsecondbysecond.Thisislaiddowninagridcode,whichcaneasilyruntohundreds,ifnotthousands,ofpages.Theseprotocolsmayinvolvenon-market-baseddeploymentofancillaryservices.Thiscanpotentiallyinterferewiththefunctioningofthemarket(Joskow2006).Therefore,mechanismstoestablishandadjustoperatingprotocolstomarketrulesareneeded.QUALITYREGULATIONAllsystemsegmentsrequireregulationofrelevantdimensionsofqualitysuchassafetystandards.Thiscouldincluderequirementstoinsulatepowercablesorkeepthematasafedistancefromflammablemateriallikeforests.Itcouldalsorequirestandardsofconstructionormaintenanceforpowerplants,includingrenderingthemrobustunderextremetemperatures.Box3.3discussesanexampleofestablishinganenergyregulatorinTurkey.SimilargovernanceandinstitutionalissuesrelatedtopowerpoolshavebeenidentifiedbyOseniandPollitt(2014):•Greatertradeopennessleadstomorecross-bordertradeinelectricity.Bothexpandedbilateralpowertradingandformalpowerpoolsrequireprecommitmenttofreetradetobesuccessful.Freetradearrangementsgenerateareasonableleveloftrusttopromotethedevelopmentofapowerpool.•Strong,efficient,andindependentinstitutionsareessentialforaneffectiveandfunctioningpowermarket.Anintegratedpowerpoolneedsanefficientoperatortooverseeandsanctiontheactivitiesofparticipants,andtopreventpredatorypricing,nondisclosureofcapacity,andotherformsofunrulybehavior.WHOLESALEELECTRICITYMARKETDESIGN25ESTABLISHMENTOFTURKEY’SENERGYREGULATOR(EMRA)InTurkeyin2001,theElectricityMarketLaw(EML)waspassedasafundamentalapproachtoeasingtheburdenofthepowersectoronthepublicbudget.ThelawalsoestablishedtheEnergyMarketRegulatoryAuthority(EMRA)asanindependentandfinanciallyautonomousregulatorofpower,gas,petroleum,andliquefiedpetroleumgas,supervisedbytheEMRAboard.EMRAisresponsibleforpreparingandimplementingsecondarylegislation;authorizingmarketparticipants;approvingandpublishingtariffs;monitoringandsupervisingmarketparticipants;conductingtechnical,legal,andfinancialaudits;settlingdisputes;approving,amending,andenforcingperformancestandards;and,wherenecessary,applyingsanctions(VagliasindiandBesant-Jones2013).EMRAissuednewbalancingandsettlementregulationsinApril2009toimprovethefunctionofthewholesaleelectricitymarket.InDecember2009,themarketmovedfrommonthlysettlementtohourlysettlement.ThisreformwasundertakenpriortotheWorldBank’sTurkishProgrammaticEnvironmentalSustainabilityandEnergySectorDevelopmentPolicyLoan(WorldBank2013).BOX3.3TEMIZYUREK/E+/GETTYIMAGESKEYELEMENTSOFMARKETSTRUCTURE26•Theviabilityofaninternationalpowerpoolshouldbeevaluatedinadvancebyapropercost-benefitanalysis.•Trustbuildingaroundelectricitytradingispossibleevenbetweencountrieswithahistoryofconflict.DesignOptionsforImplementingAgenciesTheinstitutionalincarnationofgovernancearrangementsvariesbyjurisdiction.Forexample,rulesmaybesetoutinlawsordecrees.Itisrecommendedthatregulatorybodiesareprovidedwithacertainlevelofbudgetaryandstaffingindependence.Systemoperators,marketoperators,andsettlementadministrators17maybehousedinoneorseparateorganizations.Tostrikeabalancebetweenaccountabilityandautonomyofagencies,severaltoolsexist:•Themandateofanactorlikearegulatororsystemoperatorneedstobeestablished.Thisincludessettingoutgoalsandresponsibilitiesandavailabletoolstofulfillthem:forexample,whethersystemoperatorscanusefeesaspenaltiesfornonperformancebymarketparticipants.•Processrequirementssuchasrulesgoverningthetransparencyofdecision-makingareyetanothertooltoenhanceaccountability,includingreportingandauditingobligations.Obligationstoconsultstakeholders,forexamplethroughhearings,aredesirable.•Budgetrulescanbeusedtograntandcircumscribeautonomy.Forexample,asystemoperatormaybeauthorizedtoobtainincomefromfeesleviedonparticipantsintheelectricitysystem.18Thiswouldmakeitindependentoffiscalappropriations.Atthesametime,theexpenditurebudgetmaybecontrolledbyanoversightbodysuchasaregulatororevenalegislativebody.Thiswouldcircumscribeautonomyandenhanceaccountability.•Keystaffingrulesareequallyrelevant.Forexample,appointmentofboardmembersandtopmanagementofaregulator,system,ormarketoperatorcouldbemadebyapoliticalbodylikeaparliamentoftherelevantjurisdiction,ortheexecutive,orsomespecialbody.Longertermsforappointeesprovidemoreautonomy.Staggeredappointmentofboardorcommissionmembersmayprovidesomeinsulationfromone-sidedpoliticalinfluence.•Conflictresolutionprinciplesandmechanismscanprovideautonomy:forexample,bylimitingpersonalliabilityofregulators.Disputeresolutionfora,includingcourtsorarbitrationmechanisms,canenhanceaccountability.SOFIETESSON/WORLDBANKFOURELECTRICITYMARKETDESIGNOLIVERKNIGHT/WORLDBANKWHOLESALEELECTRICITYMARKETDESIGN29Thesearchforcompetitivemarketsmaymotivatereformandforcepolicymakerstoaddressbasicproblems.However,replacingtheverticallyintegratedsectorframeworkwithanunbundledmarketstructureisnotinitselfsufficientforanelectricitymarkettofunction.Powermarketspromisethebenefitsoftransparency,efficiency,andflexibility;butwholesalemarketdesigniscrucialforrealizingtheseopportunitiesintwokeyregards.Intheoperationalsense,electricitymarketdesigndefinestheprotocolsfordispatchingelectricityinareliableandeconomicfashion.Atthesametime,marketdesigndeterminesthelong-termlandscapeoffinancialincentivesandrulesforeligibilityofinvestmentsinresourcesthatensureareliableandsecuresystem.Thedualroleofelectricitymarkets—simultaneouslyoperationalandfinancial—isadefiningcharacteristicofelectricitymarketdesign.Inaddition,manycountriesareconsideringvariouspolicysolutionstoaddressthechallengeofdecarbonizationandclimatechange,andmarketsolutionscanplayanimportantroleinthemitigationstrategy.Therapidexpansionofnewtechnologicalsolutions,includingvariablerenewableenergygenerationresources,providesbothchallengesandopportunitiesformarketdesignoptionsthatelevatetheimportanceofancillaryservices.Asthereisawiderangeofmotivations,contexts,andstartingpositionsformarketdevelopment,thereisanequallywiderangeofmarketdesignoptionsforcountriestochoosefrom.Yetcertaincommonobjectivesareexpectedfromthemarket,namely:•Promotingefficientoperationofpowersystems;•Creatingclearandeffectiveincentivesforinvestments;•Improvingreliabilityandcost-effectivenessofelectricityservices;•Expandingenergyaccess;and•Encouraginginnovationandreducingtheenvironmentalimpactoftheelectricitysector.Noteveryobjectiveisweightedequallyforeverysinglecountry,andmarketdesignchoiceswilldependonwhatobjectivesareconsideredprimaryand/ormoreurgentforaspecificcountry.Allmarketdesignchoices,however,consistofamenuoffourmaindesignelements.Policymakersandregulatorsthereforemustpaycloseattentiontothesefourmarketdesignissues,whicharethebedrockofelectricitypolicyobjectives:•Operations:Whatmarketdesignensuresthattheoverallpowersystemoperatesefficientlyonaday-to-daybasis?•Investments:Whatensuresthattherequiredinvestmentisforthcomingandefficient?•Ancillaryservices:Whatmechanismsassuresupplyanddemandbalancesecondbysecondandprotectagainstsystemcollapse?•Marketpower:Whatmechanismsmitigatetheabuseofmarketpower?ELECTRICITYMARKETDESIGN30OperationsOptimalDispatchintheReal-TimeSpotMarketThetruespotmarketisthereal-timemarketthatdeterminesactual,physicaldispatch.ItisalsocalledthebalancingmarketinEurope.Generatorsbidvolumesandpricesatwhichtheyarewillingtosell.Inthecaseofcost-basedmarkets,theysubmitdataontheirmarginalcoststhatthesystemoperatoraudits.Customersmaybidhowmuchtheyarewillingtobuyatwhatprice,19ordemandforecastsareused.Basedontheseinputs,anoptimizationprogramcalculatesoptimumdispatchandthecorrespondingvolumesandpricestakingthetransmissionsystemandsecurityconstraintsintoaccount.Thestandardmerit-orderdispatcharrangesgeneratorsstartingwiththelowestvariable(marginal)costuntilsupplyequalsdemandgiventhetotalcapacityofthesystem.20Dispatchingthelowestvariablecost21generatorfirstisefficientasitsfixedcostshavealreadybeenincurred.Forsometypesofgeneration,intertemporaloptimizationissuesarise.Somepowersourcesareenergy-limited,suchasabatteryorahydroreservoir.Sometaketimetorampupordown.Thereistheninertiainthesystem.Somehaveone-timestart-upcosts,regardlessofhowlongtheyareneeded,andsomehaveminimumoperatinglevels.Inallthesecasesoptimaldispatchmayneedtoconsiderwhathappensinthefuture.Forexample,energy-limitedsourcesofpowerlikehydropoweror,atsmallerscale,batteries,havemarginalcoststhatareclosetozero.Yet,becausetheycanonlyprovidealimitedamountofenergybeforehavingtoberefilled,theyarebestdispatchedwhentheyreplacetheenergysourcewiththehighestmarginalcost(theopportunitycostoftheenergy-limitedgenerationsource).Theyaremostvaluablewhentheyaredispatchedinpeakperiods,whichmaylieinthefuture.TypesofMarketsBID-BASEDMARKETSMostsystemsallowgeneratorstoformulatebidsfreely.Therearetwotypesofbasicbiddingrulesforgenerators.Underboth,thecheapestgeneratorsgetdispatched.Underpay-as-bid,thedispatchedgeneratorsgetpaidthepricetheybid.Underapaysystembasedonmarginalprice,alldispatchedgeneratorsgetpaidthesameprice—theonethatmatchesdemandandsupplyoverall.Underthepaysystemmarginalpricerule,generatorshaveanincentivetobidtheirtruemarginalcosts.Why?Iftheybidmore,theyrisknotgettingdispatched.Iftheybidless,theyrisklosingmoneywhentheydogetdispatched.Whendispatchhappens,cheapgeneratorshavebidalowvalueandmayreceiveamuchhighervalueifthemarginalgeneratorismuchmoreexpensive.Thishasledtoargumentsthatcheapgeneratorsarebeingoverpaidandthatthepay-as-bidapproachshouldbeused.WHOLESALEELECTRICITYMARKETDESIGN31Twobasicproblemsareencounteredwiththepay-as-bidapproach.First,thegeneratorswiththecheapestvariablecosthavethehigherfixedcostsandneedaspreadovervariablecoststocoverfixedcosts.Thismeanstheyarenotnecessarilybeingoverpaid.Second,ifonechangesthebiddingrule,onealsochangesbidderbehavior.Underpay-as-bidthecheapgeneratorwilltrytoguesswhatthehighestbidwillbe.Thenitwilltrytobidjustbarelybelowthatvalue.Ifthegeneratorguessesright,theoutcomeisthesameasunderthepaysystemmarginalprice:everybodybidsatthelevelofthepricethatbalancesdemandandsupplyoverall.However,theguessinggameintroducesextracostsduetotheextrauseofforecastingmodelsandincreasesthechanceofbiddingmistakesleadingtoinefficientoutcomes.Somebid-basedsystemsfocusonallowingbidderstosubmitprice-quantitypairsuptoshortlybeforetheactualdispatch.Inthesesystemstheinteractionofbiddersismeanttofigureoutoptimaldispatchasmuchaspossible.ThisisthecaseformostEuropeansystems,andalsoforcountriessuchasAustraliaandNewZealand.Severalotherbiddingsystemsfocusonbiddinginday-aheadmarkets,andallowmorecomplexbidformats:forexample,theinclusionofstart-upcostsorrampratesinadditiontopriceandquantitypairs.Optimizationoftheactualdispatchthenbecomesthetaskofthesmartmarket—thecomputerizedoptimizationsystem.ThisisthemodelforUSsystems.ThedifferencebetweentheEuropeanandUSapproachescanbeillustratedbyhowtheydealwithstart-upcosts—theso-calledunitcommitmentproblem.Undertheformerapproach,biddersneedtofigureoutwhetheritisworthitforthemtoincurstart-upcosts.Thesystemoperatorjustreceivesprice-quantitybids.Biddershaveanincentivetobehaveefficiently,buttheymaymakemistakesinforecastingfuturedemandfortheirunits(generators).UndertheUSapproach,bidderssubmitdataonprice,quantity,andalsostart-upcostsintheday-aheadmarket.Optimizationiscarriedoutbythesmartmarket.Thebasictrade-off:biddersmaymakemistakes,buttheoptimizationmodelmightnotfindthebestsolution(globaloptimum)whenrunningmixed-integerlinearornonlinearoptimizationmodels.22COST-BASEDMARKETSInacost-basedmarket,generatorsarerequiredtosubmittheirmarginalcost,whichmaysubsequentlybeaudited.Onecanthinkofthisasplacingacaponallowedbids.Generatorshavelimitedroomforstrategicbehaviorandthustheexerciseofmarketpower.Generatorscompetetobeavailablefordispatch.ThisisthecaseformostLatinAmericanmarkets(exceptColombia)andforSouthKorea.Thesesystemsgivecompetinggeneratorsanincentivetocutcostsandtobeavailablefordispatch.Yet,theydonotprovideincentivestorevealthebestinformationaboutthecoststhatgeneratorspossess.Costsareprovidedbygeneratorsandaudited,presentingsystemoperatorswiththechallengefacedbypriceregulators:namely,howtoassesswhethertheauditedcostsareefficient.Decentralizedtradingcannottakeopportunitycostsandintertemporaltrade-offsintoaccount.Real-time,demand-sidebiddingisimpracticalasELECTRICITYMARKETDESIGN32systemoperatorscannotreasonablyestimatetheopportunitycostsofcustomers,whichdriveprice-sensitive,real-timedemand.Thedifferencebetweencost-andbid-basedapproachescanbeillustratedwiththeexampleofenergy-limitedpower.Biddingsystemscanhandlethisproblemasbidderswillwanttodispatchenergy-limitedresourcesforthehighestpossibleprice,whichwillbeobtainedinpeakperiods.Incost-basedsystems,someformofoptimizationmodelmustfigureintheintertemporalopportunitycostofsuchresources.REGIONALPOWERPOOLSElectricitytradeacrossinter-orintrastateborderscanreducecostsandenhancereliabilitybyallowingimportsandexports.Shortofintroducingcompetitiveelectricitymarkets,manyoptionsexisttogeneratesomebenefitsfromtrade.Theyrangefromlimitedcross-bordertransmissioninfrastructurethatmaybeusedadhoc,torule-based,interconnected“powerpools”thatcomeclosetoresemblingcompetitivemarkets.Tradeinpowerpoolsholdsthepotentialtoreducecostsandthustariffsorfiscaloutlays.Exportsfromlow-tohigh-costareasloweroperatingcosts.Largertradingareasmayallowgenerationinvestorstoexploiteconomiesofscaleandbuildplantswithlowerunitcosts.Sharingofreservescanenhancesecurityofsupply.Jointsystemplanningmayalsohelpsaveonsystemexpansioncostsandallowforbetterintegrationofintermittentrenewableenergysources.Theneedtoagreeoncross-borderrulesmayhelpimprovethequalityofrulesgoverningtrade.Tradinginpowerpoolsisoftendoneunderregulatedpricingsystems,withlimiteduseofcompetitivemarkets.Pricesandvolumesmaynotcorrespondtoefficientdispatchbasedonmeritorder.Governancearrangementsareparticularlychallengingfortradeacrossnationalboundaries,ascountrieshavetocedesomecontrol—ideallytoasupranationalsystemoperator—andenforcementofpaymentdisciplinebetweencountriesisoftenhard.Mostlyforpoliticalreasons,actualcross-bordertradelagsfarbehindpotentiallygainfulexchange.Atthesametime,powerpoolsmaybestepping-stonestowardcreatingfull-fledgedmarketswithmeaningfulcompetitionamongmultipleplayers,aswasthecaseofthePJMpoolintheUnitedStates.Regionalpowerpoolsexistbetweenanumberofcountries,betweenMalaysiaandSingaporeforexample;orwithincountriesbetweenareasrunbydifferentsystemoperatorsasintheWesternInterconnectionintheUnitedStates,withinIndia,andwithinChina.Indevelopingcountries,themostadvancedtradingarrangementistheSouthernAfricanPowerPool(SAPP),with12memberstatescenteredaroundSouthAfrica.CentralAmericafeaturesapoolofsixcountries.TheWestAfricanPowerPool(WAPP)comprises14nations,butiscurrentlylimitedinbilateraltradinggiventherelativelyweakphysicalinterconnectionamongthecountries.However,thisisrapidlychanging.Others,includingtheEasternAfricaPowerPool,theMaghrebElectricityCommittee(ComitéMaghrébindel’Electricité,COMELEC),andthePan-ArabElectricityMarket,areinearlystagesofdevelopment.Inaddition,thereareseveralsmaller,mostlybilateraltradingarrangementsinAsiaaswellasinLatinAmerica.WHOLESALEELECTRICITYMARKETDESIGN33PriceFormationinMarketsThepriceformationprocessisimportantforprovidingsignalstomarketparticipantsregardingefficientsystemuseandinvestmentinnewcapacity.Supposegeneratorsareonlypaidwhentheyactuallygetdispatched(asinanenergy-onlymarket).Insuchamarket,mostofthetime,priceequalsthemarginalcostofthemostexpensivedispatchedgenerator’swillingnesstopay(WTP),andatthesametimetheWTPofthemarginalcustomer.AllotherservedcustomershaveahigherWTPasinastandardmicroeconomicmodelthatmaximizesoverallbenefitsfromtrade.Inawholesalemarket,generatorswillreflecttheirmarginalcostofsupplythroughasetofsellbidsinincreasingorderofcost.Meanwhile,customerssuchasretailersandindustrieswouldexpresstheirWTPthroughasetofdownwardslopingbids(seeFigure4.1).Marketdesignshouldprovidetheoptionforgeneratorstosubmitnegativepricebids.23Forexample,combinedheatandpowerplantsmaybeproducingheatandmayhaveinflexibleconcurrentpowerproduction.TheywouldthenhaveanincentivetobidnegativeenergyMCV:7555.83MWTotalNo.ofBuyBIDs:799TotalNo.ofSeIlBIDs:14120000180001600014000120001000080006000400020000096919382907387648455814678377528721MCP:5999.10INR/MWhDeliveryDate:09Mar2021Period:19:30–19:45MWINR/MWhBuySellClearNote:Day-aheadmarketclearingintheIndianmarket.MarketclearedforRs7,555.8/MWhinthisinstanceatRs5,999/MWhor$82/MWh($1=Rs73).MCP=marketclearingprice;MCV=marketclearingvolume;MWh=megawatt-hour.Source:Day-aheadmarketdatafromtheIndianEnergyExchange,accessedonMarch9,2021.FIGURE4.1Demand-Supply(BuyandSell)CurvefortheIndianEnergyExchangeELECTRICITYMARKETDESIGN34pricestoensurethatheatproductionneednotbecurtailed.Also,someplants(e.g.,nuclearfacilities)cannoteasilyrampupordown.Theymayneedtoselltemporaryexcessproductionatnegativepricestostimulateconsumption.Bythesametoken,intermittentrenewablesourcesshouldoptimallynotbegivenso-calledgridpriorityasthereisnoreasontobidlowerthanzero.24Sometimes—atpeaktimes—customersmaybewillingtopaymorethanthemarginalcostofthegeneratorwiththehighestmarginalcost,implyingthatallgeneratorswillbedispatchedandthesystemreachesitscapacitylimit.Atapriceequaltothemarginalcostofthemostexpensivegenerator,customerswanttobuymorethanthesystemcapacitypermits.Inanormalmarketwithprice-elasticdemand,thepricethenrisessuchthatcustomerswiththelowestWTPdropoutuntildemandisequaltosupply.Theseperiodsofhighpricesabovemarginalcostallowinvestorstocoverfixedcosts.Priceformationinelectricitymarketshasspecialfeatures,whichinclude:•Demandisusuallyhighlypriceinelasticintheshortterm.Mostpeopleandbusinessesdonotseepricesinrealtime.Theyjustswitchontheirpowerwhentheywantit.Currently,thesystemoperatordoesnothavethetechnologyandinformationtoremotelyswitchoffindividualcustomersortheirappliancesaccordingtotheirWTPwhencapacityisscarce.25Technicallyspeaking,whenthesystemreachesitscapacitylimitandthelimitedreal-time,demand-sidemanagementoptionsthatcurrentlyexisthavebeenexhausted,thesupplycurveisverticalasisthedemandcurve(seeFigure4.1).Atpeaktimesthedemandandsupplycurvesmaythennotintersect.Unconstrainedbiddingwouldgenerateaninfinitelyhighprice.Themarketbyitselfdoesnotgenerateameaningfulprice.Physically,thesystemoperatorhasto“shedsomeload,”thatis,cutsomecustomersoffsothatdemandandsupplymatch.Rationing,ratherthanresponsetoprice,balancesdemandandsupply.Inthelongrunitmaybepossibletodoawaywiththiswayofrationingifdemandcanbemademorepriceresponsive.Thiscouldbecometechnicallyfeasibleasnewtypesofmeters,sensors,andcontroltechnologyallowwidespread,real-timedemandresponsetoprices.•Whenloadsheddinghappens,allgeneratorsproduceasmuchastheycanandneedtobepaid.Themarketpricehitsthepricecapandremainsatthatlevel.Hence,aregulatedpriceisusedthattriesasbestaspossibletomimicwhathappensinanormalmarket,thatis,toreflecttheWTPofthemarginalcustomerthatcanjustbeserved.Inthelanguageofpowermarkets,thisiscalledsettingthepriceatVOLL,thevalueoflostload;or,ineconomiclanguage,theopportunitycostofnotgettingelectricity.26Thisisalsocalledscarcitypricing.•Thehigherthepricecap,thelessloadsheddingisneededforgeneratorstoobtainenoughrevenuetocoverfixedcosts.Thepricecapthusreflectsareliabilitystandard,whichmaybeexpressedintheexpectedaggregatetimeofloadsheddingoveraspecifictimeperiod,forexample,onedayin10years.Inpracticethisisoftentranslatedintoareservemarginrequirement.27Itmakesnoeconomicsensetoruleoutloadsheddingentirely,becauseitwouldrequireinvestmentsforveryrarecircumstancessuchthatextracostswouldexceedtheextraexpectedbenefits.Atwhateverlevel—abovethehighestmarginalcost—thepricecapisset,itallowsgeneratorstocovertheirfixedcostsefficiently,foragivenreliabilitystandard.28WHOLESALEELECTRICITYMARKETDESIGN35SequenceofMarketsandIntertemporalHedgingAnanalogymayhelpexplainthebasicsofelectricitymarketdesign.Considerthemarketforpassengerseatsonairplanes.Passengersbuyseatsinadvanceofflying:aforwardcontract.Whentheyshowupatthegate,itmayhappenthattheflightisoverbooked.Airlinestaffatthegatemaythenholdanauction(real-timebalancingmarket)thatestablishesthepriceatwhichasufficientnumberofpassengersdecidetotakeanotherplane.Theythengetpaidthepricebya“settlementadministrator,”inthiscasetypicallyavoucherforsomeotherflight.Electricitymarketsfeatureasequenceofmarkets(summarizedinfigure4.2).Thereal-timemarketdeterminesactualdispatchandisthusaphysicalspotmarket.Todayitispossibletorunreal-timemarketsasfrequentlyaseveryfiveminutes,asdomostUSmarketsandAustralia.InEurope,manyreal-timemarketsrunevery15minutes.Somecountriesfeature30-minuteintervals(e.g.,Japan)orhourlyintervals(e.g.,Colombia)betweenmarketruns.29Marketclearinggranularitycansignificantlyreducethesystembalancingneeds,reducingthebarrierstointegrationofvariablerenewableenergy.Asinmanyothersectorsoftheeconomy,mostmarketstradefinancialcontractsthatallowhedgingofrisksassociatedwithphysicaldispatchinthereal-timemarket.Financialmarketsexistforcontractswithdifferentmaturities.Insomemarketsvery-short-termforwardtradingispossiblebeforethereal-timemarket,untilso-calledgateclosure.Thismaybeascloseas30minutesbeforethereal-timemarket,asisthecaseinFrance.ForwardmarketSpotmarketSecurelonger-termsalesandhedgeagainstpricevolatilityClosepositions/DetermineProductionscheduleOptimize/adjustpositionsSystem/EnergybalancingtimerealtimeForward/Futuresmarket(xyearstoydaysahead)Day-aheadmarketIntra-daymarketReal-timemarketSource:Petrov2021.FIGURE4.2ElectricityMarketTimelineELECTRICITYMARKETDESIGN36Manysystemsfeatureamandatoryday-aheadmarketthathelpssystemoperatorspreparefordispatch.Insomesystems,theUSmarketsforexample,systemoperatorsusetheday-aheadmarkettoprovideinstructionstogeneratorstoincurstart-upcostsaheadofthereal-timemarket.Australia,ontheotherhand,hasnomandatoryday-aheadmarket.InmanyEuropeansystemsgeneratorstaketheriskofmakingtheirownstart-updecisions.Variousfinancialcontracts,forexampleforwardcontractsoroptionswithlongermaturities,aretypicallytraded.Financialcontractsaremostwidelyavailableforshortermaturities,sayonetothreeyears.Contractsofsuchmaturitiesareoftensoldonformalpowerexchanges,suchastheEuropeanEnergyExchangeorNASDAQ.Contractswithlongermaturitiesareavailableinvariousmarketsbutaretypicallytraded“overthecounter”ratherthanonexchanges.ImbalanceSettlementandForwardMarketsFundamentally,theexistenceofreal-timespot30marketsmakesfulfillmentoflong-termcontractseasier.Forexample,whenageneratorisunavailableduetomaintenanceissues,itcanstillfulfillalong-termcontractwithacustomerbybuyingtherequisiteenergyinthespotmarket.Likewise,acustomerwhohasover-contractedenergycanselloffsurplusinthespotmarket.Thiswaythespotpricedrivesthepriceofhedges.Box4.1illustratestherelationshipbetweenfinancialandreal-timemarkets.Atthesametime,itsetsoutthebasicsofrunningmarketsystemsasso-calledgrosspoolsornetpool,aswellasthebasicdifferencebetweenphysicalandfinancialcontracts.Adequatelydesigned,bothgrossandnetpoolsyieldthesameoutcomeandproducethesameincentives.Inpractice,somecountriesmaintainasystemofpenaltiesinnetpoolsforpurchasesinthespotmarket.TheUK’sformerNewElectricityTradingArrangements(NETA)marketfeaturedsuchpenalties.Recentlytheywereabolishedasitturnedouttheypenalizedsmallmarketparticipantsandledtoextracostsasgeneratorsmadecostlyeffortstoavoidimbalancesthatforcedthemtobuyinthespotmarket(ShuttleworthandMckenzie2002).Inprinciple,marketparticipantshavetheoptiontohedgepricefluctuationsbyconcludinglong-termcontractssuchasforwards.Forexample,inthePhilippinesalmost90percentofspotsaleswerecoveredwithhedgesofaboutone-yearmaturityinrecentyears(RudnickandVelásquez2019a).Inpractice,itmaybehardtofindcounterpartieswillingtoenterintocontractswithmaturitiesabovetwoorthreeyears(IEA2016).Liquidity,theabilitytogetinandoutofcontracts,maybelimited.Renewingcontractsmaythusbedifficult,givingrisetoarolloverrisk.Todevelopasufficientlydeepandliquidmarketforhedges,marketparticipantsneedtobelievethatmarketrulesarereasonablystable.Theexpectationthatscarcitypricesarearealpossibilityprovidesstrongmotivationtobuyhedges,asintheTexasmarketintheUnitedStates.Ontheotherhand,politicalpressuretoundopricespikesmayunderminethewillingnesstobuyhedges.Also,regulateddistributioncompaniesthatperformretailingfunctionsmaynotbuyhedgesbecausetheymayfearbeingaccusedbycustomersandregulatorsofraisingcostsexcessively.WHOLESALEELECTRICITYMARKETDESIGN37FULFILLINGLONG-TERMCONTRACTSINMARKETSINGROSSANDNETPOOLSSupposeageneratorconcludesaforwardcontractwithadistributorfordeliveryof1gigawatt-hour(GWh)atapriceof4cents/kilowatt-hour(kWh)—foratotalvalueof$40,000.Atthetimeofdispatch—intherealspotorbalancingmarket,sometimescalledtheregulationmarket—itturnsoutthatthegeneratorcanonlyproduce0.9GWh,butthedistributorneeds1.1GWh.Thespotpriceturnsouttobe5cents/kWh,reflectingtheoveralldemandandsupplybalanceatthistime.Inaso-called“grosspool,”generatorsanddistributorssellandbuyalltheyproduceorneedinthespotmarket.Thegeneratorsells0.9GWhat5cents/kWhandreceives$45,000.Thedistributorbuys1.1GWhat5cents/kWhandpays$55,000.Theforwardcontractisthensettledintheformofaso-calledcontractfordifferences(CfD).Relativetotheforwardcontract,thegeneratorbenefitsfromahigherpriceinthespotmarketandthusneedstocompensatethebuyerforthepricedifference(5−4cents=1cent/kWh)appliedtothevolumeoftheforwardcontract(1GWh).Thegeneratorthuspaysthedistributor$10,000.Thenetresult:Thegeneratorearnsanetof$35,000.Thedistributorpaysanetof$45,000.BOX4.1(continuesonnextpage)WORLDBANKELECTRICITYMARKETDESIGN38Physicaldeliveryhappensinthespotmarket.TheCfDisdeemedafinancialcontract.Ifthevolumeshadnotchangedrelativetotheforwardcontract,theCfDwouldhaveperfectlyhedgedtheirrespectivepositionagainstpricechangesinthespotmarket.CfDshedgeagainstoverallmarketpricerisk,butleavethecontractingpartiesexposedtovolumechanges.Thisprovidesgoodincentivesforthecontractingpartytocontrolwhattheycantosomedegree,namelyvolume,whileshieldingthemfromtherisktheytakeaspricetakersinthespotmarket.Inaso-callednetpool,thepartiesfirstsettletheforwardcontract.Thedistributorpaysthegenerator$40,000.Thegeneratordelivers0.9GWhoutofitsownproductionandhastobuyamake-upvolumeof0.1GWhinthespotmarketat5cents/kWhforatotalsumof$5,000tofulfillthepromiseundertheforwardcontract.Thenetrevenueofthegeneratoristhus$35,000.Thedistributorneedstobuyanextra0.1GWhfromthespotmarketat5cents/kWhforatotalof$5,000.Itsoverallpaymentisthus$55,000.Theforwardcontractisdeemedtobeaphysicalcontracthere.BOX4.1(Continued)CongestionManagementandPricingNODALPRICESIfthereisnocongestioninthetransmissionsystem,allagreedtradescanbeexecutedatthesamepricethroughoutaninterconnectedsystem.31Whenthelimitsarebinding,thesystemissplitintoseveralsubmarkets.Eachnodeinthesystemwhereindividualtransmissionlinesinterconnectcanberegardedasamarketplace.Demandandsupplyconditionsateachnodeleadtoadifferentpriceateach.32Thepricedifferencesbetweennodesreflectcongestionandtransmissionlosses.Suchpricesareoftencallednodalpricesorlocationalmarginalprices.Nodalpricesreflectboththephysicsofpowerflowandtheeconomicincentivesofconsumersandproducersateachnode.ThetheoryofpriceformationthatrenderstheeconomicsandphysicsofelectricitysystemscompatibleisattributedtoSchweppeetal.(1988).Ittakesintoaccountthefactthatelectricityflowsalongthepathofleastresistance.AnyinjectionorwithdrawalofelectricityatanynodechangespowerflowsthroughoutthewholeinterconnectedACsystem(loopflows).Atthesametime,pricesneedtoreflectdemandandsupplyconditionsateachnode.Systemwide,nodalpricesguidethedecisionsofWHOLESALEELECTRICITYMARKETDESIGN39consumersandproducerstomaximizenetbenefitsformarketparticipants.Notethatoneunusualaspectofnodalpricingisthat,betweensomenodes,electricityflowsfromnodeswithhighpricestonodeswithlowprices.Thisreflectsthephysicsofpowerflow.33Nodalpricesprovidethebestpossiblepricesignalstoconsumersandproducers.NodalpricesystemsexistintheUnitedStates.Emergingmarkets,forexample,ChileandPeru,featurenodalprices.Todealwiththeriskofchangingnodalprices,marketsmayprovidehedginginstruments,forexample,so-calledfinancialtransmissionrights(FTR)thatlockinapricedifferencebetweennodes.However,therearesomepotentialdrawbackswiththenodalpricingsystem:•Theremaybeloadpocketsbehindtransmissionconstraints,wheresomegeneratorisabletoexercisemarketpowerthatitdoesnothaveinthemarketasawhole.Havingsaidthat,inzonalmarketssuchgeneratorsmaystillbeabletoexercisemarketpoweriftheyforeseewhencongestionmightoccurandbidahigherprice,thusraisingredispatchcost.•Tradersmightlikezonalpricingbecauseitallowsmoreliquidmarketstoexistandthusimprovehedgingoptions.Atthesametime,theirhedgesmaynotcovertheriskofvaryingredispatchcosts.Inthenodalsystem,hubswithhighliquiditywilltendtodevelop,buttherewouldbea“basisrisk”forthosetryingtohedgepricesatnodeswithlowcontractcoveragebyresortingtocontractstradedatthehubs.•Peopleinoneareaofacountrymayobjecttopaypricesthatdifferfromwhatpeoplepayelsewhere.Peopledofacepricedifferencesinothermarketsthatareduetotransportcostdifferentials,buttheissueinelectricitymarketsmaybemorepoliticallysalient.Ifcongestionisarareevent,itmayfavorzonalpricing,butthatmayinitselfbeasignofovercapacity.Generally,theargumentstendtofavornodalprices.Thesealsoprovideasignalonwheretolocatenewgenerationorhowtobuildoutthetransmissionsystem.ZONALPRICESMostmarketsare,however,dividedintouniformpricingzonescoveringacountry,aprovince,orsomeothergeographicarea.Suchzonalpricesdonotreflecttransmissionconstraints.Forexample,GermanyplusAustriaisonepricezone,eventhoughthecountriesfeaturemanynodes.Brazilisanexampleofanemergingmarketwithzonalpricing.Forwardmarketsconcludecontractsignoringthepossibilityofcongestion.Whenthereisnocongestion,thisdoesnotmatter.Insomezonalmarkets(suchasinNordPool),differentzonalareasmaybeactivatedbysystemoperatorswhencongestionoccurs,approximatingasystemofnodalprices—knownasmarketsplitting.Withcongestion,thefollowingtypeofproblemmayariseunderzonalpricingschemes.Imagineasimplesystemwithtwonodes,AandB.AtnodeAthereischeapgenerationandlittledemand.AtnodeB,thereareexpensivegeneratorsandsignificantdemand.Inazonalmarket,forwardmarketshavecontractedthecheapestgeneratorstosupplyload(demand).However,whenthetransmissionlinebetweenthetwoareasiscongested,someELECTRICITYMARKETDESIGN40ofthecheapgenerationatnodeAcannotbeusedtosupplydemandatnodeB.Whatwascontractedcannotbeimplemented.Thesystemoperatorneedstointervenetobalancethesystem.ItwillinstructthemostexpensivegenerationatnodeAnottoproduceandwillinsteaddispatchtheleastexpensivegenerationatnodeBtomeetdemandatthatnode.Comparedtothecontractsconcludedinforwardmarkets,generationcostsarehigher,andthemarketpricegeneratedinforwardmarketsdoesnotgenerateenoughrevenuetocoverthecostsofadditionalgeneratorsdispatchedatnodeB.Thismaybecalledthe“redispatchcost.”Itistypicallychargedonsomeproratabasistoconsumersacrossthepricingzone.Inasystemwithnodalpricingwithcongestion,thepriceatnodeAwouldhavefallenandrisenatnodeB,allocatingthecostsofcongestiontothosewhocauseit.Withdemandresponse,therewouldbemoreuseofcheapergenerationatAandlessconsumptionatB.Nodalpricingschemesare,inprinciple,consideredmoreefficient.CONGESTIONRENTWhenthereiscongestion,thesumofalltradeleavesanetsurplus,orcongestionrent,alsocalledmerchandisingsurplus.Ignoringtheeffectoflosses,congestionrentsaresimplythedifferencebetweenpaymentsmadebyloadsandtherevenuesreceivedbygenerators.Intheory,intheabsenceofcongestion,alllocationalmarginalpriceswouldbeequalandcongestionrentswouldbezero.Theoretically,anoptimallybuilt-outtransmissionnetworkgeneratesacongestionrentthatcoversthefullcostofthetransmissionsystem.Onecouldevendecentralizeinvestmentinindividualtransmissionlineswithcostsrecoveredthroughcongestionrents(BiggarandHesamzadeh2014).34Inpractice,ithasnotbeenpossibletofullydefinecapacityrightsandrightstocongestionrentsandtosolveattendantcontractingproblems.Also,transmissionsystemstendtobeoverbuilt:forexample,torenderthemmoreresilienttothefailureofindividuallines.Thereisthenlesscongestiononaverageandthecongestionrentoftencoversonlyabout20–25percentofthecostoftransmission(Pérez-Arriaga,Rudnick,andRivier2009;Metcalf2010).Therestneedstobepaidforbyalevyonmarketparticipants.Still,itisanefficientwaytoremuneratetransmissionowners.Also,itisneveroptimaltoreducecongestiontozeroatalltimes,becausethecostofextrainvestmentwillbeofsomesignificance,whilethebenefitsofextratransmissiongotozeroascongestiondiminishes.35InvestmentMarketsdelegateinvestmentdecisionstocompetingfirms,meaninginvestmentsarenolongermanagedbyaregulatedmonopoly.Policymakersneedtobecomfortablethatmarketmechanismswillleadtoadequatelevelsofcapacityaswellasanefficientmixofcost-effectivebase-,mid-,andpeak-loadgenerationplants.Pricesignalsforoptimalinvestmentsaregeneratedinmarkets,wherepricesinmarketsvaryovertimeandbylocation.SuchvariabilitycreatesrisksforinvestorsthattheyneedtoWHOLESALEELECTRICITYMARKETDESIGN41beabletohedgeorbear.Pricevolatilityisincreasingasintermittentrenewablegenerationexpands,accentuatingtheneedforfinancialhedges.Thecruxofmarketdesignishowfixedcosts,thatisthecapacitycostsofpowerplants,arecovered.Variouscapacityremunerationsystems(andhybridsthereof)exist.Thefollowingthreebasicapproachesaresetout:•Energy-onlymarkets•Capacitymarkets•Mandatedlong-termhedgingcontractsEnergy-OnlyMarketsPricesforenergyformedincompetitivemarketsthatfullyreflectdemandandsupplyconditionsprovideincentivestoattainreliabilityandaffordability.Inaso-calledenergy-onlymarket,investorsearnrevenuewhentheysellenergy.Theyarenotpaidanadditionalpaymentforthecapacitytheyprovide,suchasanavailabilitypaymentunderaPPA.Investorsaredependentonrevenuesfromthesaleofenergytocoverbothfixedandvariablecosts.Aslongasthepriceofenergyissetbythehighestmarginalcostgenerator,allgeneratorswithlowermarginalcostsearnsomecontributiontofixedcosts.36Whenthepricerisesabovethesystem’smarginalcostandisdeterminedonlybyWTPofthemarginalcustomerorVOLL,thepeakerplantwiththehighestmarginalcostsearnsbackitsfixedcost.Allotherplantsalsobenefitfromthistocovertheirfullfixedcosts.(SeeStoft(2002)forbasicproofthatpricesincompetitiveenergy-onlymarketsprovidetherightincentivetoinvestinanoptimalmixofpowerplants.)Energy-onlymarketsarefoundinseveralEuropeancountries,aswellasinAustralia,NewZealand,thePhilippines,Singapore,andTexas(UnitedStates).Underanenergy-onlymarket,rarepricespikesareneededtoattractinvestors.Threebasicissuesarise:•Politically,theremaybeanoutcrywhenpricesdowhattheyaremeantto—asintheAustraliandrought-basedcrisisof2016–17orinTexasin2019and2021,whenpricesrosetothecapof$9,000/MWh(MartinandMalik2019).Thoughcustomerssuddenlyhavetopaysignificantlymore,mostofthetimetheypaylessthanneededtocoverallcostsofgeneration.Still,suchsystemsarepoliticallycontentious.•Investorsmayhavetowaitalongtimeforpricestospikeandfaceconsiderableuncertaintyaboutcostrecovery.•Generatorswithsomelevelofmarketpowermayhaveastrongincentivetowithholdcapacitysothatthesystemresortstomoreloadsheddingandpricespikesthanarereallyrequired.Box4.2showsanexamplefromthePhilippinesontakingmeasurestopreventwithholdingcapacity.Inprinciple,theseissuescanbedealtwithifhedgingproductsarewelldeveloped.Customerscanbuyhedges,suchasforwardcontracts,tocoverthemselvesagainsttheELECTRICITYMARKETDESIGN42TAKINGMEASURESTOPREVENTWITHHOLDINGOFCAPACITYThePhilippinespotmarketisahybridbetweenagrosspoolforgenerationscheduling,withbilateralcontractsthatoftenincludeminimumofftakerequirements.Thepowermarketremainsdominatedbyfourmajorplayersthataccountedfor62percentoftotalregisteredcapacityin2017.Seriousconflictsduetomarketpowerabusehaveoccurredinthepast,andnewcompetitorshaveslowlyenteredthroughthelargelyregulatedmarketofbilateralcontracts.Forexample,allegationsofmarketpowerabusepromptedmarketinterventionin2013,anditwaslaterruledthatmarketplayersengagedinanticompetitivebehaviorprovokingasharppricehike(RudnickandVelásquez2017).TheEnergyRegulatoryCommission(ERC)intervenedinthespotmarketbyreplacingmarket-clearingpriceswithregulatedrates.ThecaseofthePhilippineshighlightstheimportanceofdevelopingstructuresthatsupportcompetition,andtheneedforeffectivemonitoringandoversight.BOX4.2ALEXPUNKER/ISTOCK/GETTYIMAGESPLUSWHOLESALEELECTRICITYMARKETDESIGN43eventualityofpricespikes.Thatmeanstheyregularlypaymorethanthemarginalcost.Investorsthusreceiveongoingcontributionstofixedcostsandreducetheirinvestmentrisk.Whenelectricityhasbeensoldforwarditalsoreducestheincentiveofgeneratorstoexercisemarketpower,becauseiftheyhelpraisetheprice,theyalsoneedtocompensatetheircustomersforthehigherprice.Oneoptionistocappricesatlowerlevelsincasesofloadshedding.Operatingreservepricingiscompatiblewithenergy-onlymarkets(Stoft2002).Undersuchascheme,usedbythemarketinTexas(UnitedStates),pricespikesoccurnotjustinrarecaseswhenactualloadsheddingoccurs,butalsowhensomethresholdlevelofremainingoperatingreservesisreached.Thatmeanspricesspikemoreoftenand,therefore,neednotgoashightoallowinvestorstocovertheircosts.The2020pricecapamountedto$9,000/MWh.TothisdayTexashasmadeanenergy-onlymarketworkonthisbasis.Yet,anysteptoreplacemarketpriceswithregulatedcapsdiminishesthevalueofthepricesignaltoconsumers,becauseitnolongerreflectsthedemand-supplybalanceaswell.Fornow,thisisalimitedissue.Itwouldbecomeabiggeroneifandwhenwidespread,real-timedemandresponsebecomesfeasible.CapacityMarketsMarketpricecapsmakepricingpoliticallymorepalatablebutreduceincentivestoexercisemarketpower.ThishastakenplaceinsomeLatinAmericancountries,wherepricecapsaresetmuchlowerthanthescarcitylevelsreflectingtheVOLLforanenergy-onlymarket(givenareliabilitystandard).37Inthesesituations,investorsmaynotreceiveenoughmoneytocoverinvestmentandoperatingcosts.Ifthisrevenueisnotadequate,thereisa“missingmoney”problem(Joskow2013).Torecoupthatmissingmoney,capacitymarkets—ormorebroadly,capacitymechanisms—havebeenintroduced.Theirdetaileddesignsvary,buttheirbasicideaisthis:so-calledload-servingentities,forexampledistributioncompanies,holdperiodicauctionstopurchasetheamountofcapacitytheydeemnecessary.Policymayalsorequirethemtopurchaseacertainamountofcapacitysufficienttomeetnormalpeakdemand,plusareservemargin.Atperiodicauctions,generationinvestorsbidforcapacitypaymentsthatsupplementrevenuesfromtheenergymarket.38Thebiddersrequiringthelowestcapacitypaymentswin.Alternatively,capacitypaymentsmaybesetbyregulatorsasinthedesigncomingoutofChile.There,capacitypaymentstoallplantsreflectthefixedcostofpeakerplants.Thatwaypeakerplantscancovertheirfixedcosts.Allotherplantscancovertheirsaswell,astheenergyspotmarketprovidessomecontributiontofixedcostsforgeneratorswithmarginalcostsbelowthepeakerplant.Togetherwiththefixedcostofapeaker,thismimicsremunerationforoptimalcapacitylevelsinenergy-onlymarkets.CapacitymechanismshavefeaturesresemblingPPAsforIPPs.Capacitypaymentscoveragoodpartoffixedcosts,andrevenuefromtheenergymarketcoverstherest.Incapacitymarketsinvestorsnolongertaketheriskofdecidinghowmuchcapacityisneeded.Capacitypaymentsmaybesetinauctionsforjustafewmonthsormultipleyears.ELECTRICITYMARKETDESIGN44Additionally,capacitymarketsmaybetechnologyneutralorsplitintomarketsfordifferenttechnologiesandlocations.Regulatorsofsometypemakeandadministertheserules.Thismayintroducemorepoliticaldecision-makingintheinvestmentprocess.Somefavorcoal,otherswind.Marketsignalsmaynotguidethedecision.39Mandatory,Long-TermContractsSeveralcountriesinLatinAmericaarehydro-dominated,whichincreasestheneedforlong-termcapacitypayments.Long-termcontractsbetweengeneratorsandbuyersofelectricityareofteninplacetoensuregenerationadequacy.Mandatedcontractsmayextendaslongas15to20years.Buyersareobligedtoauctionoffcontractsfor,say,100percentoftheirexpectedpeakdemandplusareservemargin.Generatorsorsuppliersreceivingsuchcontractsareobligedtoprovideevidenceofthecorrespondingphysicalinstalledcapacity.Capacitypaymentmechanismspaygenerationunitownersfortheirfirmcapacity.Inpractice,thesemarketsmustbecarefullydesigned.Forinstance,generatorsmayhavelimitedincentivestomaketheseunitsavailabletotheshort-termmarket,particularlyifthesupplierownsaportfolioofgenerationunits(Wolak2021a).Somemarkets,suchasColombia,haveattemptedtoaddressthisincentivebybuildingimplicitperformancepenaltiesintothecapacitypaymentmechanism.Noncompliancewiththecontractattractsapenalty.Inefficientdesigns,contractingpartiesthatfailtoperformareobligedtohonortheirpromisesbymakingupfortheminthespotmarket.Forexample,ageneratorthatunderdeliverswouldneedtobuythemissingamountinthespotmarketandprovideittothecustomerattermsagreedinthelong-termcontract.Adistributorthatconsumeslessthancontractedwouldhonorthecontractandthenselltheexcessinthespotmarket.Detaileddesignsvary.Thereareatleastthreebasicschemes,40outlinedbelow.LONG-TERMCAPACITYCONTRACTSBiddersforlong-termcontractsexpecttobepaidthepriceforenergy,whichreflectspricessetbyacost-based,administeredmerit-orderdispatch.Theybidonacapacitypayment41that—togetherwithquasirentsearnedfromenergycharges—coversfixedcosts.Thissystem,inprinciple,leadstoanoptimalmixofplants(e.g.,baseloadandpeakers).Inanefficientbiddingsystem,thecapacitychargewouldbethesameforallcontrollabletechnologies.Thebasiclogicisessentiallythesameasinlong-termcapacitymarkets.AvariantofthisisusedinBrazilforthermalpowerplants.LONG-TERMENERGYCONTRACTSBiddersforlong-termcontractsbidonafixed(indexed)energycharge.Generatorsbidtosupplyashareofalltheenergytobecontractedover,say,20yearsasinChile,andarechosenonthebasisofthelowestprice.Generatorsmayproducesomeoralloftheenergythemselvesorbuyfromthemarkettomeettheoverallenergygoal.AtthemargintheyareexposedtospotpricesasunderaCfD.WHOLESALEELECTRICITYMARKETDESIGN45Ifonlyonecompanyhadtosupplyeverythingitwouldhaveanincentivetochoosetheleast-costmixofgeneration.Thesystemsplitsthathypotheticalmonopolyintocompetingshares.Intheaggregate,generatorshaveanincentivetooffertheleast-costsolutionatthelowestprice,thatis,theleast-costmixofpeakandbaseloadthatprovidesassurancethatdemandcanalwaysbemet(seeWolak2021bforthemechanicsoftheapproach).42RELIABILITYOPTIONSThiscontractingsystemconsistsofcreatingacapacitymarketandmandatinggeneratorsatthesametimetoissue“reliabilityoptions.”Merit-orderdispatchsetsenergypricesbasedonbiddingbygenerators.Thereliabilityoptionassuresthebuyerthatthepriceofenergycannotriseaboveapredeterminedstrikeprice.43Inadditiontothisoption,therecanbevoluntaryforwardcontracts(e.g.,CfDs)thatmayhedgeenergypricesbelowthelevelofthestrikepriceoftheoption.Generatorsbidforcontractsthatpromisetobeavailablewheneverneeded,evenatpeaktimes—hencereliabilityoptions.Intheauctiontheybidapricethatjointlycoversthemissingmoney(likeacapacitypayment)andthecostoftheoption.Whenreal-timeenergyspotpricesaretightlycapped,capacitypaymentsforthemissingmoneyarehigh.Whenenergypricesaresubjecttoahighercap,thepaymentforthemissingmoneydrops,buttheoptiontoinsureagainstpricespikesbecomesmorevaluable,offsettingthefallincapacitypayments.Attheextreme,ifpolicymakerswantedtomovetoanenergy-onlymarket,thepricecap(scarcityprice)couldbesetattheVOLL.Theimpliedcapacitypaymentwouldbezero.Theoptionwouldstillassurebuyersthatpricescannotexceedthestrikeprice.VariantsofthisschemehavebeenintroducedinColombiaandthePJMmarketintheUnitedStates.Thereliabilityoptionapproachallowsregulatorsflexibilitytovarythepricecap(scarcityprice)whilepreservingthepricehedgesforconsumersandgeneratorsandleavinggeneratorsexposedtobid-basedmarketpricesinthespotmarketatthemargin.44AncillaryServicesThebasicmarketdesignelementsdiscussedaboveformthecoreofmarketdesign,buttheyarenotsufficienttoassureabalanceofsupplyanddemandsecondbysecondandprotectionagainstsystemcollapse.So-calledancillaryservicesneedtobeatthedisposalofthesystemoperatortomanagethequalityandstabilityofthepowersupply.Theyinclude“regulation”and“contingency”reservesusedforfrequencyandvoltagecontrolandservicesrequiredtopreventsystemcollapse.Regulationreservesaremeanttoprovideaveryfastresponsetofrequencyimbalances.Contingencyreservesarereservesthattakeseveraltensofminutestobecomeavailable.45Traditionalpowersystemmanagementprotocolstendtodrivethewayancillaryservicesaredeployedbysystemoperators.ELECTRICITYMARKETDESIGN46RegulationandContingencyReservesSeveralmarketsintheUnitedStates,Australia,andsoonthePhilippines,areruneveryfiveminutes.Yet,systemsneedtobebalancedinshorterintervals—lessthanaminute.Inthedispatchintervalbetweentworunsofthemarket,generatorsmayhaveproblemsdeliveringordemandmaychangeunexpectedly.Tocopewiththis,systemoperatorsbuystandbyservices—whatinAustraliaiscalled“raise”or“lower”services—generatorsordemandresourcesthatthesystemoperator(SO)canutilizetobalancethesystem.InAustralia,theseareprocuredatauctionseveryfiveminutesconcurrentwiththemainenergymarket.Generatorscanthusdecidewhethertobidforbeingdispatchedortoprovidestandbyservices.Suchstandbyserviceauctionswouldnolongerbeneededifmarketswererunalmostcontinuallyinrealtime,butthatisnotthecurrentreality.Differenttypesofgeneratorsprovidingregulationorcontingencyserviceshavedifferentramprates,orinertia.Theythusprovidedifferingqualitiesofserviceforbalancingpurposes.Forexample,Europeanmarketsdistinguishbetweenprimary,secondary,andtertiaryreserves.Primaryonesneedtorespondwithin15seconds,secondaryoneswithin30seconds,andtertiaryoneswithin15minutes.Thereisthusavalueinhavingdifferentsubmarketsforregulationandcontingencyreservesreflectingtheirquality.Theintroductionofintermittentrenewables(solarandwind)increasestheneedforafastresponseonanever-largerscale.Solarandwindhavenexttonoinertia.Whenthewindstartsblowingorthesuncomesoutfrombehindtheclouds,controllablegeneratorsneedtorampdownalmostimmediatelyandviceversawhenthewindorsundisappear.Specialsubmarketsforveryfastresponsegenerationthusmakemoreandmoresense.Hydroreservoirsandaboveallbatteriesexcelinprovidingfastresponse.SystemStabilitySystemoperators,inaddition,needtoprovideapublicgood:systemstability.Theymay,forexample,needtocallonsystemelements,suchascapacitorsandinductors,tocontrolso-calledreactivepower—thepowerthatperformsnowork.Thismaybenecessarytopreventvoltagephasedifferencesleadingtoasystemcollapse.Ortheymayneedtocalloncertaingeneratorstooffsetsuddenoutagesorsurgesindemandtoavoidcascadingcollapses.Aslongasthesystemisstable,pricesreflectthecostsandbenefitsfromdispatchingthebestgenerators.Whenthesystemcollapses,thereisnomorepriceforelectricity.Thereisthusnopriceestablishedinthemarketthatcouldremuneratetheservicesthatensuretheexistenceofthemarketinthefirstplace.Theprovisionofsuchservicesmaybecontractedoutcompetitively—aformofcompetitionforthemarket.Leviesonparticipantsintheelectricitymarkettypicallycoverthecostofsuchservices.Leviesmaybeimplicit.Forexample,systemoperatorsmaybeabletodirectgeneratorstoprovideserviceswithoutpayment.Itthusbecomesacostofdoingbusinessformarketparticipantsthatultimatelyispaidforbyendusers.WHOLESALEELECTRICITYMARKETDESIGN47ProcurementofAncillaryServicesandCo-OptimizationGeneratorsreceivepaymentsnotonlyforenergyorcapacityprovisionbutalsoforancillaryservices.Investorsneedtoevaluateallpaymentstreamstogethertomaketheirdecisions.Ancillaryservicescanbeprocuredindifferentways.Theymaybepurchasedthroughanauctionforstandbyservicesorthroughnegotiateddeals.Thetraditionaloptionistopurchaseancillaryservicesindependentlyoftheenergymarket,forexample,so-calledstrategicreservesthatareonstandbyatthesystemoperator’sdisposal.Ancillaryservicesareultimatelypaidforbycustomersthroughsometypeoflevy.Yet,forregulationandcontingencyservices,theauctionshouldideallyallowco-optimizationwithdecisionsmadeinthemarketforenergy.Forexample,byauctioningoffcontractsforstandbycapacitysimultaneouslywithauctionsforenergyasintheAustraliancasementionedabove.Theexistenceofgenerationcapacitythatispaidforbyout-of-marketpurchasesgivesrisetoworriesthatsystemoperatorsmayattimesdeploysuchgeneratorsinwaysthatdepressenergypricesandreducerevenuesforinvestors,thusunderminingtheveryessenceoftheenergymarket(Joskow2006).Aslongasinvestorscanforeseethisadequately,itmaynotmatter.Yet,itdoesaddalayerofuncertainty.Toreducesuchuncertainty,ruleshavebeenintroduced:forexample,torequirestrategicreservestobidintoanenergy-onlymarketonlyattheVOLL.46RemediesfortheAbuseofMarketPowerElectricitymarketsmaybeplaguedbytheexerciseofmarketpower.Thekeyfeasibleremediesareasfollows:•Theremustbeasignificantnumberofcompetinggenerators.Largemarketsfeaturehundredsofplants.Asufficientnumberoftheseplantsneedtobeindependentlyrun.Anythinglessthanfourindependentplayersinvitesseriousissues.Hence,itmaybeadvisabletohorizontallyunbundlegenerationcompaniestocreatemoreofthem,asdoneinArgentinabeforethemarketwasintroducedin1992;deploymergercontrolstopreventlargeplayersfrombeingcreated;andmakemarketentryfornewinvestorsaseasyaspossible.•HedgeslikeCfDsreducetheincentivetoexercisemarketpower,becausetheyrequiregeneratorsexercisingmarketpowertocompensateconsumersforit.Hedgesaremostlikelytobeusedextensivelyinmarketswithscarcitypricing.•Limitingpricespikesviaoperatingreservepricingorcapacitymarketscanreducetheincentivetoexercisemarketpower,butmayalsounderminethedevelopmentofliquidhedgingmarkets.•Buildingouttransmissionsystemstolimitinstancesofcongestioncanhelpcontaintheemergenceofloadpockets,wheresomegeneratormaybeabletoexercisemarketpower,butthiswillalsolowercongestionrentsandmayleadtoovercapacity.ELECTRICITYMARKETDESIGN48•Becauseexpost,antitrust-styleactionagainstcompaniesexertingmarketpowerisveryhard,47severalsystemsuseauditedcostestimatestocapthepossiblebidsofgeneratorsthataresuspectedofbeingabletoexercisemarketpoweratcertaintimes(Cramton2017).MostsystemsinLatinAmericaonlyallowcost-basedenergypricesatalltimes.•Developingreal-timedemandresponseinasmartgridcouldhelpalot.Demandwouldbecomemoreresponsivetoprice.Whenpricesrise,demandwouldbecutback.Companiesexercisingmonopolypowermightbeabletoraisethepricebutlosesignificantvolume,thuslimitingtheincentivetoexercisemarketpower.Exposureofdemandtotruescarcitypriceswouldbeneededtomakedemandfullyresponsivetosystemconditions.Thebasicremediesformarketpowerproblemsarethustiedupwiththedesignprinciplesformarkets.Markets,ClimateChange,andEnergyTransformationTheelectricitysectorisgoingthrougharapidtransformation,facingpressuretoswiftlyadapttoclimate-change.Fromoneside,theenergytransformationresultsfromgrowingappreciationofurgentlyneededactionstodecarbonizethesector—reflectedingovernmentactions,suchasrenewableenergypoliciesanddecarbonizationtargets.Fromanotherside,energytransformationresultsfromfast-pacedtechnologicalinnovationsbothonthesupplyanddemandsides,leadingtorapidadoptionofnewsolutions.Largesharesofvariablerenewablegenerationarenecessaryinanydecarbonizedelectricitysystemandthisrequireadaptationtoincreasedlevelsofvariabilityanduncertainty.Adecade-longexperiencegloballyhasproventhatalow-carbonpowertransformationistechnicallyfeasible.Whetherthistransformationcanactuallybedeliverednowlargelydependsonasuitablemarketdesignandregulatoryframeworks.Toincentivizethesechanges,marketsmustadaptandmayneedtobecomplementedbyregulations.Whiledevelopingcountriesfaceseriouschallengesintheirpowersectors,theycaninvestinmoreflexibleassetsaspartofoverallexpansionorreplacementplans,thuscreatinganopportunitytoleap-frogdirectlytoabetter-adaptedsystem(IEA2014).AsmarketsinEurope,partsoftheUnitedStates,andAustraliahavedemonstrated,althoughitispossibletoattractflexiblegenerationthroughappropriatecapacityandbalancingmarkets,muchworkremains.Severalareasofmarketdesignneedtobeconsideredtoensurepowersystemsarebestadaptedtothedecarbonizedsystemsofthefuture.Whilethesearchforthebestmarketandregulatoryinstrumentsisstillongoing,thefollowingaspectsneedtobeconsideredwhiledesigningthemarkets.WHOLESALEELECTRICITYMARKETDESIGN49ControllingEmissionsandCarbonPricingGreenhousegasemissions,forexamplecarbondioxide(CO2)emissions,constituteanexternality—acostinthiscase—thatisnotautomaticallypricedinthemarket.Carbonpricingcanbeanefficientapproachtointernalizingtheclimateexternalityandcanbeestablishedinvariousways.Thesubsidyinvolvedinfeed-intariffsisonemethodthataimsatrecognizingtheclimatebenefitsofrenewable,intermittentenergy.However,feed-intariffsareabluntwayofpricingtheexternalitybecausethetariffsareadministrativelydeterminedandmaynotreflectthetruecostofcarbon.Someprojectsbasedonfeed-intariffssaveemissionsatlowcost,othersathighcost.InGermany,theimplicitpricepaidforpertonofCO2reductionbysolarandwindplantsrangesfromabout$50/tonto$500–$900/ton.Feed-intariffscanthusgenerateunnecessarywaste(Marcantonini2014).AnalternativemechanismhasbecomepopularinUSelectricitymarkets:renewableportfoliostandards.Theyrequirepowersystemstoproduceacertainshareofpowerwithcleanenergysuchassolarorwind.Thiscreatessomescopeforutilitiestochoosethemostcost-effectivesolutionstomeetthetarget.Yet,differentportfoliostandardstillimplydifferingimplicitpricespertonofCO2acrossareas.Mechanismstoreduceemissionsatlowestcostwouldconfrontpowerproducers(andallotheremittersforthatmatter)withasinglepricepertonofcarbon.ThiscouldbedonethroughataxonCO2orbyissuingtradablepermitstoemitCO2.Theformermethodamountstosettingapricethatwillleadtosomeoverallvolumeofreduction.Thelattermethodfixesthemaximumvolumethatcanbeemittedandthenderivesapricethroughtradeinthemarket.Efficient,single-priceschemesofthistypemaybepoliticallycontroversial,buttheycanwork.Anumberofcountriesrunsuccessfultradeablepermitregimes,liketheEmissionsTradingSchemeintheEuropeanUnionortheRegionalGreenhouseGasInitiative(RGGI)intheUnitedStates.Allapproachestocontrolemissions—regulations,taxes/subsidies,andtradablepermits—putapriceonemissions,throughpenaltiesortaxes.Theyallrequirethatemissionsarewellmonitoredsuchthattaxesorpenaltiescanbeassessedand/orpricesformed.Theydifferintheefficiencywithwhichtheyachievetheultimategoal:atargetedreductioninemissions.Fornow,politicalconcernshaveledtoaplethoraofpartialsolutions.Inanumberofcases,multipletoolsaredeployed,forexample,portfoliostandardsand/orfeed-intariffsplustradableCO2permits.Oneproblemisthatthesolutionsarepartialandhavelimitedoveralleffect.Theotheristhatwhenmultipleincentivesaredeployed,foreachcaseonlyoneisbindingbutthecostofadministeringconcurrentschemesisincurred.Regardlessofwhichmethodofemissioncontrolischosen,theexplicitorimplicitpricesplacedonemissionswillbereflectedinthebiddingstrategiesofgeneratorsinthemarket.Marketscanhandlethemall.Yet,somearemoreefficientthanothers.Whatispoliticallycontentiousisthatanytypeofemissioncontrolwilltakejobsfromworkersin“dirty”ELECTRICITYMARKETDESIGN50occupationsandleaveinvestorsindirtylegacyplantswithstrandedcosts.Compensationcan,inprinciple,bedesignedsuchthatcontinuedoperationofdirtyplantsmakesnoeconomicsense,whileprovidingsomereliefforthoseaffectedbylossofincome.Forexample,pollutionpermitscanbeauctionedoffandrevenuesusedforcompensationschemes.VariableRenewableEnergyandBatteryEnergyStorageConcernaboutclimatechangeandsometimesaboutenergysecurityhaspromptedgreatinterestinrenewableformsofenergy,particularlyintermittentsourcesofpower:windandsolar.Inenergy-onlymarketswithoutanysubsidy,renewableswouldneedtorelyonlyonrevenuefromenergysales.Theywouldreceivecontributionstocovertheirfixedcostsasanyotherplant.Inanenergy-onlymarket,thatwillprovideadequatesignalstoinvestors.Yetpricesbecomemorevolatile—droppingtozerowhenintermittentrenewablesmeetalldemand(orevenbecomenegative,dependingonthedesignofmarketremuneration)andjumpingtohighlevels—duringscarcitypricing.Capacitymarketsareexploringwhetherandtowhatextentintermittentsourcesofenergyshouldreceivecapacitypayments.Iftheycontributeatthetimeofpeakdemand,theyshould.Iftheydonotcontributeatpeaktimes,theydonotsaveonothercapacityinvestmentthatisneeded.Theythenneedtobeprofitableeveniftheyalwaysreceivethesystempricethatisdeterminedbythehighestmarginalcostplant.Inenergy-onlymarketsintermittentsourcesthatcontributeenergyatpeaktimeautomaticallygetscarcityprices.Incapacitymarketsregulatorsmakesomewhatarbitrarydecisions48onhowmuchintermittentsourcescontributeatpeaktimes.Severalcountries—forexample,Chile,Brazil,Colombia,andMexico—tackletheissuebyrequiringintermittentrenewablesproducerstosupplyfirmenergyaswell.Theintroductionofintermittentenergybringsnewchallengesforthemanagementofpowersystems.Whenthesundoesnotshine,orthewinddoesnotblow,traditionalformsofgenerationmayneedtobedeployedtorapidlyrampup.Thisalsomeansthemixoftraditionalgenerationneedstochangetoplantswithfastramprates(e.g.,naturalgasand/orhydropower).Inpracticeandintheabsenceofmeaningfulcarbonprices,intermittentrenewablesourcesofpowerhavemostlybeenpromotedbysomeformofindustrialpolicy,forexample,throughspecialfeed-intariffsorrenewableportfoliostandards.Eachapproachcanbemadecompatiblewiththemarkets.Consider,forexample,feed-intariffs.Theymaybesetbysomeregulatororestablishedatanauction.Suchfeed-intariffscanbemadecompatiblewithenergymarkets.Solarandwindproducersmaybidinanenergymarket.Theyusuallygetdispatched,becausetheirvariablecostisessentiallyzero.49Thedifferencebetweenthepriceobtainedinthemarketandthefeed-intariffisthenpaidouttoinvestorsasasubsidy,asinGermanyandtheUnitedKingdom.Alternatively,sometypeofportfoliostandardorotherregulatoryrequirementmaybeused.ThepenaltyfornotmeetingitincreasestherelativevariableWHOLESALEELECTRICITYMARKETDESIGN51costofenergysourcescompetingwiththosepromotedbyastandardorregulation,andthusaffectsbidsinthemarket.Favorabletaxtreatmentofrenewablesisanotherwaytolowertheirrelativecostandthuspenalizeotherformsofenergy.Anotherimportanttechnologytoprovidesystemflexibilitywithinstantrampratesisbatteryenergystorage(BES).Interestinbatterystorageisrapidlyexpandingaroundtheworld,facilitatedbyrapidlyfallingpricesforthistechnology.Subsequently,storagemarketsaredevelopingmuchfasterthananticipated(seefigure4.3)althoughtheuptakeofBESisonlystartingtotakeoff.Storagesolutionsareanintegralpartofenergysystems.Theyaddflexibilityandstabilitytothegrid,particularlyincountrieswithmorematureenergysectors.Batteriescanenhancethevalueofintermittentrenewables.Theycanstoresurplusrenewableenergyandmakeitavailablewhenitdisplacesthehighestcostalternative.Theyalsoprovideveryrapidrampingcapability,whichrendersthemvaluableforancillaryserviceprovision.Sofar,duetocostandcapacitylimits,batteriescanplayonlyalimitedrole;butascostsdecrease,theymaybecomemorewidespread.Inprinciple,batteriescanbeintegratedintoelectricitymarketslikeothertypesofenergy-limitedgeneration,forexample,pumpedhydropower.Theystoreenergywhenpricesarelowandsellwhentheyarehigh.Investorswillcoverthefixedcostsofbatteriesfromthatpricedifference.Inthiswaymarketpricesprovideefficientsignalsforinvestmentinbatteriesinenergy-onlymarkets.Incapacitymarketsbatterieswouldbenefitfromcapacitypaymentsasitisgenerallyoptimaltouseenergyfrombatterieswhentheopportunitycostishighest,thatis,whensystemcapacityisshort.UnitedStatesChinaJapanIndiaGermanyUnitedKingdomAustraliaSouthKoreaOther35302520151050Gigawatts(GW)2018201920202021202220232024202520262027202820292030Source:BloombergEnergyFinanceascitedinDeloitte2017.FIGURE4.3CumulativeStorageDeploymentbyCountry,Projections2018–30ELECTRICITYMARKETDESIGN52DistributedEnergyResources:DistributedGenerationStandbygenerationtocopewithpoweroutageshastraditionallybeenwidespreadinpooreconomies,mostlyintheformofcontrollable,diesel-poweredgenerators.Amultitudeofdispersedgenerationsources—fromdieselgeneratorstorooftopsolartoelectricbatteries—constituteaformofdistributedgeneration.Optimallyforsuchstandbygeneration,dieselgeneratorshavelowfixedcosts(thecostof“insurance”againstpoweroutages)andhighvariablecosts.Asthecostofenergyanddigitaltechnologylowers,distributedgenerationisalsobecomingafavorableenergyalternativeincountrieswhereaccesstogrid-connectedelectricityisdifficult.Indevelopedmarketssuchlow-fixed-costandhigh-variable-costgeneratorsmayalsobeusedtocopewithpoweroutages.Facedwithunreliablepower,largerfirmsmayalsoprovidetheirownregularpowerviacaptivegeneration,oftenwithouttheoptiontosellsurpluspowertothegrid.Nowadays,decentralizationisbeingquicklyadoptedindevelopedsystemstoo.Householdsorbusinessesmayinstalltheirownintermittentsourceofenergysuchasrooftopsolar,recentlyalsocombinedwithbatterystorage.Severaldataanalyses(e.g.,Navigant2018)showthatnewdistributedenergyresource(DER)capacityadditionsarealreadyoutpacingdeploymentofnewcentralizedgenerationcapacity.ForecastsseetheproliferationofDERsanddistributedgeneration,inparticularatthegloballevel,inthenext10years.Bothintermittentenergyfromrenewablesandbatteriesarehigh-fixed-costandlow-variable-costsourcesofsupply.Relativelymorefixed-costsourcesofgenerationshouldideallyfeedintothegrid,notjustduringemergenciesbutalsoduringnormaltimes.Forintermittentsourcesofenergyinparticular,customersdependonthegridattimesthatthesunandwinddonotprovideenergy.Whentheydo,customersusetheirownpowerinsteadofthatfromthegrid,andtheymayhavetheoptionofsellingsurpluspowertothegrid.Thiscreatesawiderangeofnewbusinessmodelsandregulatoryapproaches.Forinstance,Colombiaisexploringnewwaysofrestructuringitsretailmarket,includingthepossibilityofintroducingnodalpricingatthelevelofdistribution.Theintentistoenablemorevibrantcustomerparticipation,aggregation,andnewformsofmarketactivity.Apracticalquestioniswhatcustomersshouldpayforthepowertheybuyfromthegrid,andhowmuchtheygetpaidforthepowertheyselltothegrid.Formarketdesign,anotherquestionarises:howcandistributedgenerationmostefficientlybeintegratedinthemarket?Captivepowerplantsforlargefirmscouldhavedirectaccesstowholesalemarketsaspartofcompetinggenerationsources.Thevalueofdistributedgenerationdependsonthecostandreliabilityofthegrid,tariffandsubsidydesign,andtheexistence—aswellassophistication—ofbothwholesaleandretailcompetition.Smallercustomerswithnewformsofhomegeneration(prosumers)arehardertointegrateintomarketsoptimally.Insomedevelopingcountries,therapidgrowthofrooftopsolarismakingitchallengingtomanageadistributiongridnotmeantforbidirectionalflows—asinVietnam,where9.3GWofrooftopsolarcapacitywasaddedinthemonthofDecember2020inresponsetoafeed-intariffpolicy,surpassingthetargetof12.5GWby2023.WHOLESALEELECTRICITYMARKETDESIGN53DistributedEnergyResources:DemandResponseReal-timedemandresponseholdspromisetominimizecapacityneedsinanymarket.Itcanbeparticularlyhelpfultodampenpricefluctuationsnecessitatedbyintermittentenergysources.Generally,itisbecomingmorepracticalandcost-effectivetoallowcustomerstorespondtoelectricitypricesinrealtime.Largeconsumersalreadyrespondtopricesbyparticipatingdirectlyinwholesaleelectricitymarkets.Theybuytheirexpectedconsumptioninadvanceandrespondtopricevariationsbyresellingontheshort-termmarkets.Inaddition,smartmetersandprogressinautomationtechnologiesincreasinglyenableevensmallerconsumersandhouseholdstobepriceresponsive,eitherdirectlyorthroughthird-partyaggregators.Dynamicpricingoptions,suchascriticalpeakpricing,areastraightforwardwaytotapintothispotential.Alternatively,customerscandelegatepartsofdemandmanagementtosystemoperators.Thelatterhavemoreandmoretechnicaloptionstoadjusttheelectricityuseofcustomers,suchastheuseofheatingandair-conditioningsystems.Muchofthedemandresponsemaybepreprogrammedandfacilitatedbythe“internetofthings,”whereallsortsofsensorsandmeasuringdevicesprovidetheunderlyingdataandcommunicatethemtorelevantdecision-makers.Thisoptiontreatsdemandresponseasgeneration,anddispatchesitonwholesaleelectricitymarkets.Directparticipationofdemandresponseaggregatorsincapacitymarketshasbeeneffectiveinkick-startingdemandresponseinseveralmarkets,suchastheUSregionaltransmissionorganizationPJM.Marketdesignwillneedtoallowpass-throughofreal-timepricestofinalcustomers.Thiswouldincludeexposing“retailers”or“aggregators”offinaldemandtoreal-timeprices.Suchaggregatorshaveanincentivetoofferfinalcustomersmoreattractivepriceplansinreturnforcustomers’physicalresponsetoreal-timeprices.Forinstance,in2017,Brazilintroducedbothtime-of-usetariffsandanincentive-drivendemandresponseprogramtoelicitdemandresponsefromlow-,medium-andhigh-voltageconsumers,aimingtoreduceandtime-shiftdemandloadfrom(previouslyauthorized)consumers—notnecessarilyonlylarge—todisplacethermalgenerationinthecentralizedmeritorder.Themovetowardreal-timepriceresponsewouldbefacilitatedbyintroducingcompetition-basednodalpricingatthetransmissionorwholesalelevelaswellasindistributionsystems.Intheorythisispossible,butnotyetpractical.Fornow,distributionsystemoperatorsmaypursueoptionstomonitorandcontroldemandinmorerefinedways,yetstillfallingshortofnodalpricing.Thisatleastallowsmoreoptionstorespondinrealtimetoefficientpricesatthenodesofthetransmissionsystem.Asmarketsfeaturemoreplayersandallowdemandresponse,itbecomesmoreandmoreimportanttoallowpricestoemergebasedonbiddingandtousepricesforenergytogenerateagreatershareofrevenue.UNDERTAKINGREFORM54FIVEUNDERTAKINGREFORMMINISTRYOFKENYAWHOLESALEELECTRICITYMARKETDESIGN55ReformProcess:MarketObjectivesandCountryContextObjectives,institutionalcapacity,socialacceptanceofpricefluctuations,andtheriskappetiteofpolicymakersvaryacrosscountries,signifyingthatmarketdesignshouldadapttolocalconditionsandbalancethemtoachievedesiredoutcomes.Clearlyoutliningwhatisdesiredfromintroducingelectricitymarketsisespeciallyimportantinthisprocess,andthetrade-offsbetweendesignoptionsneedtobeproperlyweighed.Anappropriatemarketdesignfordevelopingcountriesneedstobeviewedintheoverallcontextofinstitutionalcapacity,marketstructure,socialacceptabilityoffluctuatingprices,andmanycompetingobjectives,beitgreatereffectivenessinbringingneededgenerationsupply(especiallyVRE)ortheincreasedefficiencyofcertainsystemareas.KeyDesignOptionsThemarketdesignprinciplesdiscussedsofardonotsuggestasinglebestmodel.Severalcoreoptionsaresummarizedasfollows:•Shouldpricesusedtooptimizeoperationaldispatchbebasedonbidsorbasedontheauditedcostsofgenerators;thatis,shoulditbeabid-orcost-basedmarket?•Shouldtransmissionconstraintsbereflectedinpricesthatmaydifferateachnodeofthesystem,orshouldtherebesomeformofuniformpricing?Thatis:nodalorzonalpricingsystem?•Shouldfixedcostsberecoveredonlyfromrevenuegeneratedfrompricesforenergyactuallydelivered,orshouldfixedcostsbecoveredatleastinpartthroughregularspecialpaymentsforcapacity?Thatis:anenergy-onlymarketorwiththeadditionofthecapacitymarket?•Shouldlong-termcontractsbetweenbuyersandsellersofelectricitybevoluntaryormandated?Inpractice,therearemanyadditionaldesignelements.Themarketrules,orthegridcode,caneasilyruntohundredsorthousandsofpages.Eachmarkethasitsownquirks.Sometimesdesignfeaturesareill-conceivedorhaveunintendedsideeffects.Hence,ongoingreviewandadjustmentofmarketrulesiscommon.Thisrequiresanadequategovernanceframeworkforrulemakingandenforcementinthelightofexperience.50Decidinghowtorespondtoabovequestionsindesigningthemarketshoulddependonthecontextofthespecificsystemandpolicyobjectives.Forexample,theexperiencesofarsuggeststhatmarketswithfewerbarrierstotime-andspace-varyingpricesignals,resultinginhigherpricefluctuationsandexperiencingscarcitypricingmoreoftentoremuneraterelevantgeneration,effectivelymanagethesystems.Thisisespeciallytruewithincreasedamountofintermittentrenewableelectricitygeneration.Itmay,however,conflictwithagovernment’sobjectiveofflatteningpricechanges.Asanotherexample,UNDERTAKINGREFORM56anodalpricingsystemprovidesstrongersignalsforcongestionmanagementandreflectsnetworkconditionsinrealtime,evidencedbyPJM-likemarkets.YetthegovernmentsofEUcountriesandmanydevelopingcountrieswillfinditdifficulttoacceptdifferingpriceswithintheirnationalborders,althoughthereareestablishedmechanismstomanagethis.51Developingeconomieswithrelativelysmallpowersystemsmaybeparticularlyconcernedaboutabuseofmarketpoweranditmayprovidearationalefor,initially,goingforacost-basedmarketdesigndrivingdispatch.Theseexamplesofregulatoryconstraintsreflectthemultiplicityofcountrycontextsandregulatoryobjectivesthatmayrangefromminimizationofelectricitycostsinonecountrytopromotionofrenewablesupplyinanothertoensuringequityandbasicaccessinathird.Importantly,developingeconomiesmaywanttoprovideextracomforttoinvestorstomakesuregrowingdemandforelectricitycanbemet.Manymarketsindevelopedcountriesaredesignedforsaturatedsystemswithflat,orevencontracting,demand,whiledevelopingcountriestendtoexperiencerapiddemandgrowththatprioritizesfinancingrapidgrowthofinvestmentsingeneration.Concernsaboutaccessandinvestmentfavordesignsthatmakeinvestorrevenuereasonablypredictable,whilemaintainingsomedegreeofmarketdisciplinebyuseofauctions.Thisreinforcestheargumentforsometypeofcapacityremunerationmechanism,whetheracapacitymarketormandatorylong-termhedges.Aliquidmarketforlong-termcontractsofsometypemaybeofparticularvalueforcountrieswithapotentialforcost-effective,largehydropowerplantsandmaybeoverallwellsuitedforlargersharesofintermittentrenewables.Wheninvestorscancrediblyexpectrevenuestoremuneratecapacity,theyarelikelytoconsiderlong-gestationprojects—includinghydropowerandnuclearfacilities.Atthesametime,suchcapacityremunerationmechanismscan,inprinciple,bedesignedinatechnology-neutralfashionbyplacingalltypesofinvestorsonanequalfooting.Smallpowersystemsindevelopingcountriesmaybetoosmallforelectricitymarketstobepracticable(Besant-Jones2006).Asmanyas32countriesinAfricahaveaninstalledcapacityofunder1GWbasedonIEAdatafor2016.Regionalelectricitymarketsmayprovideanimportantandfeasibleoptiontooptimizetheirpowercosts,protectagainstfuelpriceshocks,andreliefincasesofgenerationshortfall(OlmosandPérez-Arriaga2013;OseniandPollitt2014).Countrieswithsmallpowersystemsstandtogainthemostfromadditionaltransmissioninterconnectionstocreateeconomiesofscaleandenhancetheirenergysecurity,butthatwillbetrueforlargersystemsaswellinthecontextofgeographicallyvariedenergyresources.Formarketstoworkwell,investorshavetobelievethatthemarketrulesaresustainableandwillnotbecapriciouslyadjusted.Thisimpliesthatakeyconcernistheunderlyingpoliticsofpricingandrevenuegeneration.Forexample,energy-onlymarketsrequirepoliticaltoleranceforrare,drasticpricespikes.Nodalpricingschemesrequiretoleranceforpricesthatvaryacrosslocationswithinacountry.WHOLESALEELECTRICITYMARKETDESIGN57ReformProcess:ChecklistforImplementationThefollowingisagenericchecklistofthestepsofamarketreformprocess,theirpossiblesequence,andtherelativecomplexityoftheeffortsinvolvedineachstep.Itisintendedtobeabriefoverview,sinceseveralactivitiesmeritseparate,extensivediscussionsandfullreports,possiblyasasequeltothecurrentpaper.Step1.AssessmentofPrerequisitesforReformChoosingwhentointroduceawholesalemarketiscriticaltoitssuccess,yetthequestionoftimingrarelygetstheattentionitwarrants.Thetimingandstructuringofreformaffectwhetheritispossibletogarnerthenecessarymomentumandpublicsupport.Theoptimumtimelinedependsonarangeoffactors,asdiscussedbelow.POLITICALSUPPORTThedecisiontoembarkonapolicyreformtointroduceanewmarketorstrengthenanexistingonerequirespoliticalsupport.Suchsupportmaybedrivenbyseveralfactors,notallofwhichnecessarilyalignwiththeprinciplesofanelectricitymarket.Nevertheless,itisimportanttounderstandthemotivesforsupportingamarket.Thisisbestdoneupfront,throughastakeholderconsultationprocess.Understandingthesemotiveswillhelpprioritizetheissuesathand,assessthesustainabilityrisks,andtailorthemarketdesigntobestalignwithkeyprioritiesandpolicyobjectives.GOVERNANCECAPACITYAswholesaleelectricitymarketsbecomeincreasinglysophisticated,theyrequireacertainlevelofcapacityamongtheministryofpower,theregulator,thesystemoperator,andgenerationanddistributioncompanies,aswellaslargecustomers,toensuretheirefficientoperations.Thisisasignificantaskthatcallsforacomprehensiveassessmentofthecapacityofallmarketparticipantsandthewidersetofstakeholders.Thereareinevitablegapseveninsystemswithgoodplanningandregulatorypracticesinplace,asmarketregulation,whilenotalwaysgreater,willrequireadifferentsetofknowledgeandskills.Itisimportanttodevelopagapanalysisthatwilladdressresourcesandskillsthatwillneedtobepluggedrealisticallyoveraperiodoftimeandtoadaptthemarketdesignaccordingly.READINESSFORMARKET-CENTRICREFORMInmanycases,pastreformprocessesoftenstoppedatverticalunbundlinganddidnotproperlydealwithimportantissuesaroundtransmissionaccess,transmissionpricing,highmarketconcentrationandassociatedmarketpowerissues,accesstoupstreamfuel,legacyPPAs,anddownstreamtariffreformneededfordistributioncompaniestohavesufficientdegreesoffinancialviabilityandcapacitytoparticipateinthemarket.AlthoughtheseUNDERTAKINGREFORM58issuesarewellknown,manymarketshavebeendesignedwithoutfullattentiontothesedetails,remaininghighlyilliquidandhencenotservingtheirpurpose.Theseissuesneedtobeidentifiedupfront,possiblythroughawhitepaperthatclearlylaysouttheminimumpolicyreformsthatmusttakeplacebeforeamarketofanykindcanbeintroduced.Itisimportantthattheminimumlevelbearticulatedclearly,metinfull,andreflectedinthemarketdesign,withaprovisionforadditionalfeaturestobeintroducedasconcomitantreformsareputinplace.PHYSICALPARAMETERSOFPOWERSYSTEMSThewhitepapercouldalsoassessfeasibilityofintroducingamarketinaparticularpowersystemconsideringitsphysicalcharacteristics,includingthesystemsize,thenatureandcompositionofgenerationsources(e.g.,must-rungenerators),theirfuelsupply,and,therefore,thefeasibilityofhavingenoughfuturemarketparticipantsfromthegenerationanddemandside;availabilityofasufficientlydevelopedtransmissiongrid;andthesystemmonitoring,automation,andcontrolequipment.Havingtheseconsiderationsinplacemayinformdecisionsaboutmarketdesign,whetherjoiningaregionalmarketisanoption,orsetatimelineformeetingthesephysicalpreconditions.FINANCIALHEALTHCHECKAcomprehensivefinancialassessmentofallkeyplayers,especiallythepurchasingentities(includingcross-borderpowerimports),isacriticalrequirement.Inasystemwithfinanciallydistresseddistributioncompaniesorinadequatefinancialproductsneededforspotpricevolatilityriskmanagement,awholesalemarketcanserveverylittlepurposeandattimesmayevenworsenthestateofsomeoftheseentities.Paymentdisciplineandthesolvencyofutilities,combinedwiththeabilitytodeliverservicesandlast-resortmeasures,mustbeensured.Asector-leveleconomicandfinancialanalysisofthepositionofkeyplayerswillhelpavoidmeltdownsthathaveoccurredinsomemarkets.52Step2.ChoiceofMarketDesignWHITEPAPERAstheprecedingdiscussiondemonstrates,amultitudeofissuesneedtobeconsideredwhenchoosingamarketdesign,thedetailsofwhichwillinevitablyvarytosuitspecificcircumstances,evenifthegeneralprinciplesarethesameandparticularattributesresemblethoseofanothermarket.Thesenuancesarecriticaltothesuccessofamarketandneedtobefullyreflectedoninawhitepaperbuildingontheanalysisofprerequisites.Akeyprincipletorememberisthatthedetailsofmarketdesigncanandshouldvarytofittheidiosyncrasiesofeachsystemwhilerespectingbasicdesignprinciplesthatdriveefficientoperationintheshorttermandprovidetherightinvestmentsignalsinthelongerterm.Itisalsoimportanttobuildanadequatedegreeofflexibilitytoadjustdesignparametersforthemarkettoremainagile.Defacto,designsarefine-tunedoverWHOLESALEELECTRICITYMARKETDESIGN59theyears—aprocessthatthemostadvancedelectricitymarketscontinuetoundertakeeven25yearssincetheycommenced,continuallyadaptingtomeetevolvingpolicyobjectives.Amajorpitfalltobeavoidedisthepropensitytocopyadetailedmarketdesignfromanothersystem,eveniftherearecertainadvantagestoitintheveryshortterm.Thewhitepaperonmarketdesignneedstofocusonthesystemathand,outliningitscurrentgovernancesetup,regulatorycapacity,financialstate,technicalknow-how,andphysicalinfrastructure.Itmaytakesometimetocollectinformationanddevelopthewhitepaper,butthisistimewellspent.STAKEHOLDERCONSULTATIONStakeholderconsultationisanintegralpartofdecidingthemarketdesign.Theprocessneedstobeextensive,withadequaterepresentationfromgenerators,buyers—includingdistributioncompanies—transmissionsystemowners,systemoperators,theregulator,investorsandfinancialinstitutions,awidearrayofnationalandinternationalexperts,andcustomerrepresentativebodiesincludingcivilsocietygroups,andsoon.Theprocessneedstobeconductedefficiently,withsufficienttimebudgeted,toensureadequateconsiderationofallviewsandavoidtheundueinfluenceofoneormoredominantstakeholders.MARKETRULESMarketrulesarethemostcriticalcomponentsofanymarket.TheyareintendedtobealivingdocumentthattranslatestheElectricityActintoasetofrulesdescribinghowtheactshouldbeinterpreted,therolesofconcernedagencies,physicalconnectionrequirements,productdefinitions,howpricesandquantitiesaretobedetermined,specificresponsibilitiesandliabilitiesofmarketparticipants,market/systemoperationrequirements,andsettlementarrangements.Thereisgreatvariationintheirlevelofdetailacrosscountriesandmarkets.Asthemarketdesignshouldbetailoredtoaparticularsystem,themarketrulesalsoneedtobesystemspecific,andinallcasesfullytransparentindescribingallrelevantresponsibilities(includingtheinformationtobedisclosedbyeachparticipant),penaltiesfornoncompliance,andsoon.Sufficienttimemustbeallottedforthefulldocumentationoftheinitialsetofrules.Achangemanagementprocessshouldbeputinplacetoallowadjustmentstotherulesasneeded,includingchangesreflectingfeedbackfromthestakeholderconsultationprocess.REGULATORYANDREPORTINGARRANGEMENTSAmarketregulator’sroleencompassesallaspectsoftheElectricityAct,rangingfrommarketmonitoringanddisputeresolutiontoensuringtransmissionanddistributioncostrecoveryandchartingapathfortheevolutionofthemarket.Theintroductionofamarketcansubstantiallystretchtheroleofatraditionalregulatorinaverticallyintegratedregime—afactthatiseasilyoverlookedwhensettingupamarket.UNDERTAKINGREFORM60Aspowersectorsinmostcountriesareundergoingatransitionwiththeintroductionofrenewableenergy,anincreasinglevelofsophisticationonthetechnologyfront,andgreatercustomerparticipation,thejobofamarketregulatorisbecomingincreasinglycomplex.Aregulatorwilltypicallyneedtocontinuemanyofitsexistingfunctionsaroundtariffsettingforretailcustomersandgridreliability,yetaddseveralnewfunctionsandstreamlineothers,especiallyaroundtransmissionanddistributionregulationinamarketenvironment,toensurethatthemarketoperatesefficientlyandtransparently.Regulatoryfunctionsneedtobearticulatedclearly,andsufficientcapacityfornewormodifiedfunctionsensured.Thereportingrequirementsofmarketparticipantstotheregulatorsandalsotheinformationtheseentitiesandtheregulatoritselfneedtopublishroutinelymustbeclearlydefined.Empirically,therehasbeenasurprisinglackofoversightinsomeareas,includingalackoftransparencyonthefundamentalmarket-clearingprocess,thelevelofinformationthatthegeneratorsarerequiredtofurnishtotheregulatorandforpublicdisclosure,theperformancestandardofgeneratorsandtransmissionassetowners,marketmonitoring,andsoon.Itiscriticalthattheseissuesbefullysettledattheoutsettodevelopacrediblemarketplace.Awealthofgloballessonsmaybeusedtosetupbestpracticesinkeyareasandensuretheincumbentregulatorybodyhasthenecessarycapacitytoimplementtheminimumlevelofregulationneeded.Acomprehensivecapacity-buildingeffortmayneedtobeembeddedinthissteptoensuretheregulatorycapacityisuptotherequirementsoftheinitialcommencementofthemarket.TRANSITIONMECHANISMDESIGNThedesignofthiscriticalmechanismmustaccountforkeyconcernsthatmayneedtobeaddressedduringamarket’searlyperiodofoperationtoavoidtheriskofamajordisruption.Suchconcernsincludethefinancialhardshipofabuyerorseller,legacycontractissues,thetimeneededtoimplementmeasuresneededforthephysicalsystem,financialproductsneededtomanagepricevolatilityrisks,andsoftwareformarketclearingandsettlementthatmaynotbeessentialbutcanrenderthemarketmoreefficient.Transitionmechanismsarebydefinitionshort-termandtemporarymeasures.Sincetheyarecriticaltoamarket’stimelystartandtominimizetheriskassociatedwithanewmarket,itisimportantthatsufficienttimebespentondesigningthenecessarymechanisms,consultingwithkeystakeholderstoaddresstheirspecificconcerns,andensuringthattheseareeventuallyaddressedforthemarkettofunctionproperly.Step3.MarketCommencementINSTITUTIONALARRANGEMENTSSignificanteffortsareneededtoensurethemarketstartsontimewithresponsibilitiesallocatedappropriatelyacrossagencies(includingtheregulator,themarket/systemoperator,buyersandsellers,supportinginformationtechnologyvendors,andconsultants)andthenecessaryprotocolsinplace.ThetimetableforamarketstartisoftenarbitrarilyWHOLESALEELECTRICITYMARKETDESIGN61setwellinadvancewithoutfullrecognitionoftheeffortneededtodeveloprelevantinstitutionstoafullyfunctionallevel.Meanwhile,unforeseendelaysdiscouragemarketparticipantsandcandestroythecredibilityofthemarketevenbeforeitstarts.Thetimetableneedstoreflectrealityandbeconservative,accommodatingpotentialdelays.TESTSANDPILOTSEvenarelativelysmallelectricitymarketthattrades20terawatt-hours(TWh)ayearmaytradearound$1billionwithinthattimeframe.Theprecisionandtransparencyofthemarket-clearingprocess,includingthesoftwaresystemthatisusedformarketmanagementandmarketclearingandsettlement,physicalconnectionsfordatatransfersfrom/toallmarketparticipants,andsoon,needtobethoroughlytested.Anauditofthesesystemsneedstobeenshrinedinthemarketrulesandbefollowedrigorously.Evenafterthetestsareconducted,thereshouldbeapilotphaseduringwhichthemarketoperatesbuttheoutcomesarenotbinding.INITIALPROBLEMSANDTROUBLESHOOTINGEvenwiththebestoftransitionmechanisms,testing,andpilotingprogramsinplace,somepricingandsettlementoutcomeswilltypicallyrequireinvestigationandpotentialfixes.Thesecouldrangefromsoftwareglitchestodata/communicationfailuresandunpredictableoutagesinthephysicalsystems,toparticipants’lackofunderstandingofpricing/settlementoutcomes.Ittakesadedicatedteamatalllevels—themarket/systemoperator,theregulator,andtheministry—toresolvetheseissuesefficientlyandbuildparticipants’faithinthesystem.UNDERTAKINGREFORM62Endnotesi.Thetermscompetition“inthemarket”and“forthemarket”gobacktoanarticlebyEdwinChadwickfrom1859.Heusedtheterms“inthefield”and“forthefield”(KleinandRoger1994).1.Monopoliesneednotbestaterun,andcompetitionmayalsoinvolvestate-ownedcompanies.Inpractice,manyelectricitymonopoliesarestateowned,andstate-ownedcompaniesrarelycompetewithoneanother.Evenifallowed,theirincentivetoperformiseasilyunderminedbyanimplicitguaranteeoftheirfinancesbythegovernment—thatis,thetaxpayers.2.Duringthistime,researchersattheMassachusettsInstituteofTechnologyandtheircollaboratorssetouttodemonstratethateconomicprincipleswereactuallycompatiblewiththephysicsofelectricity.Powerdoesnotalwaysflowfromlow-pricednodesinapowergridtohigh-pricednodes.Instead,itspreadsacrossthenetwork,followingthepathofleastresistance.However,competitivetradingofelectricityandmarket–basedpriceformationwaspossiblewhenexplicitlyconsideringthephysicalstructureandconstraintsofthetransmissionsystem.Pricesateverynode(nodalpricesorlocationalmarginalprices)wouldreflectdemandandsupplyconditions,takingintoaccountcongestionandtransmissionlosses.Competitivetradingwouldgiveconsumersthebestdealandremunerateproducersforoperatingandinvestmentcosts.TheresultswerefamouslysummarizedbySchweppeetal.(1988).In1996,Order888bytheFederalEnergyRegulatoryCommissioncreatedopenaccesstotransmissionsystemsandthefunctionalunbundlingofutilitiesthatenabledcompetitioninthemarket.3.TheinitiationofpowermarketreformisdatedforallcountriesinIFC(forthcoming).4.Often,systemswithcompetitioninthemarketaresubdividedintothosewith“wholesale”andthosewith“retail”competition.Thedifferenceiswhohasaccesstothemarketonthedemandside—onlylarge(wholesale)usersoralsosmaller(retail)users—withsomewhatarbitrarycut-offsofwhatqualifiesaswholesaleorretail.5.Captivepowerplantsandoff-gridconnections(minigrids)havebecomepopularinrecenttimesindevelopedmarketsaswellaspartofeffortstopromoteresilienceandrenewableenergysources,forexample,rooftopsolar.6.FurtherattemptstoassesstheimpactofbroadpowersectorreformsarefoundinNagayama(2010)andErdoğdu(2014).TheWorldBank(2019)providesareviewofexperiencewithmarketdesignbasedonanalysesoffourcountries:Colombia,India,Peru,andthePhilippines.7.Theoften-quotedthresholdof“fourcompetitors”isbasedontheviewthatcollusivearrangementsamongmorethanfourcompetitorsarehardtoreachandmaintain.See,forexample,Selten(1973).8.Foranillustrationofthejudgementrequired,considerChileandNorway.Today,bothcountriesfeaturepowersystemsbasedoncompetitioninthemarketthathavewithstoodthetestoftime.WhenChilestartedconsideringthefirstreformofitstypeinthelate1970s,fewcouldforeseethatthecountrywouldberipeforapowermarket—givenitscheckeredpoliticalhistoryandasmallsystemsizeofjustover2GW.Equally,WHOLESALEELECTRICITYMARKETDESIGN63Norwayisasurprisingplayerwho,asasocialdemocracy,successfullyestablishedanewtypeofmarketwithmanystate-ownedplayersin1990.Interestingly,bothcountriesimplementedreformsamidstmajormacroeconomiccrises.9.Variousdegreesofunbundlingarepossible:accounting,functional,legal,andcorporateunbundling(Hunt2002).Somedegreeofunbundlingmaymakesenseevenwhenthereisnointenttointroducecompetition.Itmaysimplyhelpimprovecostaccountingandincentiveswithinthemonopolyandthusmanagement.10.Notethatasystemoperator,marketoperator,andsettlementadministratorcanbepartofthesameorganizationorseparate.11.Inpractice,ittendstobepoliticallyeasiertounbundlepreviouslystate-ownedsystems.12.Strictlyspeaking,monopoliesneednotbestaterun,andcompetitionmayalsoinvolvestate-ownedcompanies.Inpractice,manyelectricitymonopoliesarestateowned,andstate-ownedcompaniesrarelycompetewithoneanother.Evenifallowed,theirincentivetoperformiseasilyunderminedbyanimplicitguaranteeoftheirfinancesbythegovernment,thatis,thetaxpayers.13.Inlargenaturalgaspipelinesystems,moredecisionscanbedecentralizedastheUSmodeldemonstrates.Essentially,thisisduetotheabilitytostorenaturalgasflexiblyanddirectitsflowinwaysthatareeithernotfeasibleortooexpensiveinelectricitysystems(Makholm2017).14.Inpractice,manymarketsfeaturemostlysupply-sidebidding.Demandisoftenaccepted“asis,”exceptforsome“interruptible”customers.15.Partoftheregulatedrevenuetransmissionoperatorsreceivemaybefromso-called“congestionrents”(seesectionontransmissionpricingbelow).16.ThecrucialdebateabouttheindependenceofthesystemoperatorissetoutinJoskow(2007b)andHogan(1998).17.Systemoperatorsareresponsiblefortheoperationandcontrolofthebulkpowersystemto(1)meetloadandsecurityneedswithreal-timedispatchtobalancesupplyanddemand,(2)manageancillaryservices,and(3)managetransmissioncongestions.Marketoperatorsfocusonenergytrading,scheduling,andsettlementofenergytransactionsindifferenttimehorizons.Marketsurveillanceadministratorshelpinmanagingfair,efficient,andopenlycompetitiveoperationofmarkets.Theirmandateistocarryoutsurveillanceand,whenneeded,investigationforthegeneration,transmission,distribution,trade,purchase,orsaleofelectricity,orancillaryservices.18.Thefeesthemselvesmaybesetbyaregulator.19.Forexample,NewZealand,theScandinaviancountries,andPJMintheUnitedStatesprovideoptionsfordemand-sidebids.Inpractice,demand-sidebiddingisnotfoundinallsystems.20.Instylizedterms,thelowestmarginalcostgeneratorstendtobesolarorwindpower,followedbyhydroandnuclear,thencoalfollowedbygas,andfinallydieselplantswiththehighestvariablecost.21.Thelowestvariablecosttothesystemmaybeestablishedbybidsorviaauditedcostdataapprovedbysomeformofregulator.22.PeterCramton,anauthorityonelectricitymarketdesign,hasarguedthatbynowadvancesinoptimizationmodelshaverenderedthemmoreefficientthanbilateraltradingamongmarketparticipants(Cramton2017).UNDERTAKINGREFORM6423.Severalsystemsexplicitlyallowforthat.Forexample,FranceandseveralotherEuropeansystemsallownegativepricebidsdowntoafloorof€500/MWh.24.Whereproductiontaxcreditsareprovidedtorenewablesproducers,theyhaveanincentivetobidnegativepricesdowntothevalueofthetaxcrediteventhoughitwouldnotbeeconomictodispatchrenewablesinthiscase.Insomesystems,forexampleinGermany,solarandwindhave“gridpriority”:theymustbedispatchedinpreferencetoothergeneratorsevenifsomeotherplantbidsnegativeprices.25.Thisisgraduallychanging.Forexample,inseveralUSstates,systemoperatorscanturndownairconditionersinanticipationofstrainsonsystemcapacity.Householdsthatchoosetoparticipateinsuchdemand-sideprogramsbenefitfromlowerbills.Largercustomershaveforsometimehadtheoptiontoconclude“interruptible”servicecontractsatlowercosts.26.Inpractice,theWTPoftheaveragecustomersubjecttoloadsheddingmaybeestimated.27.ThisisatraditionalstandardintheUnitedStates(Stoft2002).28.ActualvaluesofVOLLusedindifferentsystemsvary.Bywayofexample,inAustralia’snationalelectricitymarketthewholesalepricecapforthetimeofloadsheddingwassetat$14.70/kWhinfinancialyear2019/20.Thiscomparestopricesofsay$0.3–$0.4/kWhatnormaltimes.Onthelowerside,thePhilippinesfeaturedapricecapofabout$0.64/kWhin2019.29.Toaccommodateunexpectedcontingenciesbetweenrunsofthereal-timemarket,systemoperatorsdeployso-calledancillaryservicessuchthatdemandandsupplymatchsecondbysecond.30.Notethatsometimesshort-term,day-aheadmarketsarecalledspotmarkets,althoughstrictlyspeakingtheyarenotreal-timespotmarkets,forexample,theScandinavianNordPool“Elspot”market.31.Itisasiftherewereonelargemarketplaceandtransportcostsdidnotmatter.However,transmissionsystemsdohavetransportlimits.32.Evenifjustonelineiscongested,allnodalpriceswilldifferbutonlytwoofthemwillbeindependentofeachother.Ingeneral,iftherearemcongestedlines,thereareonlym+1independentprices.33.Foranexpositionofthetheoryofnodalprices,seeBiggarandHesamzadeh(2014).34.IntheUSnaturalgassystem,ithasprovenpossibletodecentralizeinvestmentdecisionsinnewpipelines.Also,tradeofslicesofcapacityispossible—asofapipelinecontainingaseriesof“straws”thatonecanbuyorrenttotransportgas.Thisismadepossiblebyflexibleoptionstostoregas,forexample,througha“linepack”andbyusingvalvestodirecttheflowofnaturalgas(Makholm2017).InChile,sometransmissionlinesthatconnectplantstothegridwerefinancedbyindependentinvestors.Theselinescanbethoughtofasextensionsoftheplant.ItisalsopossibletoallowindependentinvestorstobuildDCinterconnectorsbetweentwoACsystems.PowerflowonDClinescanbecontrolledandinvestorscanassesscongestionrents(BiggarandHesamzadeh2014).35.Thisisageneralpoint.Forexample,itmakesnoeconomicsensetobuildoutroadsystemssuchthatcongestionneveroccurs.Thebenefitsofreducingtraveltimealittlewillbelessthanthecostofbuildingandmaintainingtheextraroadspace.WHOLESALEELECTRICITYMARKETDESIGN6536.Baseloadplantshavehighfixedcostsforavailabilityandlowmarginalcostsfortheprovisionofenergy.Inasystemwithanoptimalmixofplants,theyrunallormostofthetimeandthushavethelowestlevelizedcostofelectricityorrevenuerequirementperunitofoutput.Peakerplantshavelowfixed(availability)costsbuthighvariable(energy)costs.Theyrunonlyforshortperiodsoftimeandhavethehighestlevelizedcostofelectricity.37.Incost-basedspotmarkets,thecapisequaltothehighestmarginalcostallowed.38.TheChileanmarketdesignfeaturesaregulatedcapacitypayment.39.Inenergy-onlymarketsregulatorssetthepricecapthatcorrespondstoavolumeofcapacity.Heremarketforcesareconstrainedbyaregulatoryfiat,yetinatechnology-andlocational-neutralfashion.40.Thediscussionlaysoutthebasiclogicoftheseschemesandomitsmoredetailedfeatures.Forexample,inChile,biddingforlong-termcontractsisbrokendownbyblocksreflectingtimeofdayorseason.ThecharacterizationoftheChileanandBrazilianmarketisbasedoncommunicationreceivedfromAlexanderGaletovicattheUniversidadAdolfoIbanezinChile.TheprinciplesbehindtheColombianapproacharebasedonCramton,Ockenfels,andStoft(2013)andRudnickandVelásquez(2019b).41.TheBraziliancapacitypaymentsaredenominatedinreais/MWh.Thisisafixedhourlypaymentpercapacityofonemegawattindependentofwhethertheplanthasbeendispatchedandhassoldenergy.42.AvariantofthisapproachexistsinChile.There,biddersexpecttobepaidanadministrativelysetcapacitypaymentbasedonthefixedcostsofapeakerplant.Biddingisfortheenergypricethatcoversthepaymentforboththevariablecostofenergyandthecontributiontocapacityremunerationfromtheenergymarket.43.InColombiatoday,theenergypriceiscapped(scarcityprice)atthehighestmarginalcost.Inthepast,theproxyusedtosetthispricehasnotalwaysreflectedtheeffectivemarginalcostinColombia.44.Thefollowingthreecasesillustratethewaythesystemworks,inprinciple.Case1:Whenthepricecapintheenergymarketequalsthehighestmarginalcostofgeneratorsandinturnequalsthestrikeprice,thenloadneverpaysenergypricesabovethemarginalcost.Theamountgeneratorsseekatauctionsisequivalenttoacapacitycharge.Case2:WhenthecapisatVOLL,loadpaysmorethanthestrikepricewhenthereisascarcityevent.Atthesametime,thestrikepricemaystillequalthehighestmarginalcost.Inthiscasegeneratorsobtainenoughrevenueintheenergymarkettocoverfixedandvariablecosts,buttheyhavetocompensateloadforanypricehigherthanthehighestmarginalcost.Thisisequaltothemissingmoneyorthecapacitychargeincase1.So,generatorsseekthesameamountasincase1.Case3:ThepricecapmaybebelowtheVOLLandthestrikepriceabovethehighestmarginalcost.Thereisthensomemissingmoneyintheenergymarketandacosttofulfillthereliabilityoption.Thesumofthesetwoitemsis,inprinciple,thesameasincases1and2.Hence,generatorsseekthesameamountatauctionregardlessofthecombinationofthepricecapandstrikeprice.45.Notethatterminologyandimplementationdetailsvaryacrosssystems.UNDERTAKINGREFORM6646.InAustralia,forexample,somegeneratorsproviding“securityservices”thathavebeenpaidforthroughout-of-marketpurchasesmayonlybeallowedtobidintothemarketattheVOLL.Thiswaytheywillonlybedispatchedwhenthesystemabsolutelyneedsthem.47.SeeBiggarandHesamzadeh(2014)foradiscussionofthechallenges.48.Optimizationprogramcanbeusedtoapproximatehowmuchintermittentrenewablesshouldbenefitfromcapacitypayments,byestimatingtheir“effectiveloadcarryingcapacity.”Thisisachallengingtask,especiallyforgenerationplantswhoseoutputsdependonexternalities,suchashydropowerplantswheretheamountofavailable(or“firm”)capacitywilldependonthequalityandaccuracyofhydrologicalconditions.49.Insomesystems,Germanyforexample,solarandwindhave“gridpriority”:thatis,theyhavetobedispatchedinpreferencetoothergeneratorsevenifsomeotherplantbidsnegativeprices.50.AreviewofmarketdesignissuesincountriesoftheOrganisationforEconomicCooperationandDevelopmentisfoundinIEA(2016).51.Mostmarketswithnodalpricingaddressthischallengebysimplychargingfinalcustomersaweightedaverageofthepricingforthewholezone(thatcanbeacountryorregion).52.AWorldBankstudypublishedin2020analyzed15casestudiescomparingcost-recoveryratespre-andpost-reformacrossdevelopingcountries.Thestudyfoundthatelectricitytariffsarerarelyhighenoughtoensurecostrecoveryandalthoughthelevelofrecoveryhasgenerallyimprovedovertheyears,thereissignificantvariabilityacrossthecaseswithasmanyashalfthecasesshowingadeclineinthepostreformperiod.Thestudypresentsanexcellentconceptualframeworkthatcanbeadoptedtounderpinthesector-leveleconomic/financialanalysisneededaspartofareform(seeHuenteleretal.2020).WHOLESALEELECTRICITYMARKETDESIGN67GlossaryAncillaryservices:Technicalservicesnecessarytoensurereliablepowersupplyandareliableoperationofapowersystem(i.e.,necessaryforfrequency,voltage,andpowerloadtoremainwithincertainagreedlimits).Ancillaryservicesusuallyincludefourbroadservices:frequencymeasure(e.g.,spinningreserves,balancing);voltagecompensation(e.g.,powerfactorcorrection);supplyreconstruction(e.g.,blackstart);andoperationalmanagement(e.g.,gridmonitoring,redispatch).Balancingmarket:Abalancingmechanismthatisbasedonmarketprinciples(i.e.,bidsandoffersfromthesupplierofbalancingservices).Balancingservices:Asetofvarious,reactive,short-termmeans,techniquesandmechanismsusedbyaSystemOperatortoensurethattherearenofrequencydeviationsinthepowergrid(thatissupplyanddemandareequaloveracertaintimeperiod).Capacitymarket:asub-marketinsomewholesaleelectricitymarketstopaygenerationresourceswithapreviouslyagreed-uponpriceforbeingavailabletoproduceelectricityatfuturedatewhenneeded,ensuringreliability.Capacityisnotactualdeliveredelectricity,butrathertheabilitytoproduceelectricitywhencalledupon.Congestion:Congestionoccurswhenatransmissionline(orlines)reachesitsmaximumcarryingcapacity.Whenthisoccurs,theregionsoneithersideoftheconstraintareconsidered‘islands’inpriceterms.Oneislandcannotsupplyanymoreelectricitytotheother,meaningdemandhastobemetbylocalgenerationplants.Congestionrent:Congestionrentsormerchandisesurplusarethedifferencebetweenpaymentsmadebylocationalloadsandtherevenuereceivedbygeneratorsatthetimeoftransmissioncongestion.Intheabsenceofcongestion,alllocationalmarginalpriceswouldbeequalandcongestionrentswouldbezero.Theoretically,anoptimallybuilt-outtransmissionnetworkgeneratesacongestionrentthatcoversthefullcostofthetransmissionsystem.Contingencyreserves:Reservethataresufficienttocovertheunplannedoutage(disconnect)ofalargegeneratorortransmissionlineandmaintainsystembalancewithoutcascadingoutages,lossofdemandorcurtailedfirmtransfers,systeminstability,orexceededvoltageorthermallimits.Contingencyreservesaregenerallysplitbetweensynchronous(spinning)andnon-synchronous(non-spinning)reserves.ContractforDifferences(CfD):Afinancialcontract,inwhichtheselleragreestosellaspecifiedquantityofelectricityforwardataspecifiedpricetoacustomerduringaspecifiedperiod.Whenspotpricesdivergefromthecontractedpricethepartybenefittingfromthepricedifferencecompensatestheotherforthepricedifferenceappliedtotheforwardcontract.UNDERTAKINGREFORM68Co-optimization:Incontrasttoatraditionalsystem,inwhichancillaryservicedispatchisdeterminedsequentially(eitherbeforeorafterenergydispatch),inaco-optimizedsystem,thesystemoperatordeterminessimultaneouslywhatcombinationofenergyandancillaryservicesthegeneratorshouldsupplyeachhourtominimizetotalpowersystemcosts.Cost-basedmarket:Amarketwheregeneratorssubmittheirmarginalcostsdata,whichthesystemoperatorcanaudit,andbasedonwhichthegeneratorsaredispatched.Day-aheadmarket:Amarketthathelpssystemoperatorsprepareforadailydispatchandisoperatedthroughanauctionwhichtakesplacethedaybeforedispatchallyearround.Allhoursofthefollowingdayaretradedinthisauction.Decarbonization:ZeronetemissionsofCO2,aswellasthestabilizationofemissionsofshort-livedgreenhousegasessuchasmethanethatdissipateintheatmosphere.Economicdispatch:Theeconomicdispatchprocessisshort-termdeterminationoftheoptimaloutput(meritorder)fromthegeneratingplantsneededtomeetthesystemload,atthelowestpossiblecost,subjecttotransmissionandoperationalconstraints.DistributedEnergyResources(DER):Small-scalepowergeneration,storageordemandresponseresourceslocatedclosetowhereelectricityisused(e.g.,ahomeorbusiness).DERsystemsmaybeconnectedtothelocalelectricpowergridorisolatedfromthegridinstand-aloneapplications.DERsystemscanbeusedbyconsumerstomanageenergybillsandensurereliablepowerbyaugmentingaconsumer’scurrentenergyservicesortooperateindependentlyoftheelectricitygrid.Energymarket:Sometimesreferredtoaspowerexchange,anenergyorelectricitymarketisasystemenablingthepurchaseandsaleofelectricityasacommodity.Electricitycanbebought,sold,andtradedinwholesaleandretailmarkets.Energy-onlymarket:Whereascapacitymarketsaimtoensuregridreliabilitybypayingparticipantstocommitgenerationfordeliveryyearsintothefuture,energy-onlymarketspaygeneratorsonlywhentheyactuallysellpower.FinancialTransmissionRights(FTRs):Acontractthatentitlestheholdertoreceiveorpaycompensationfortransmissionchargesthatarisewhengridcongestioncausespricedifferencesbetweennodes.Forwardmarket:Themarketsegmentinwhichelectricityistradedforfutureperiods.Typicaldeliverytimescanrangefromdaystomonthsorevenyearsinthefuture.Grosspool:Amarketwheretheclearingpricereflectsfulldemandandsupply,evenifsomeofthedemandorsupplyissettledoutsideofthemarket.Imbalances:Differencesbetweenrealtimeproductionandconsumptionvolumes.IndependentPowerProducer(IPP):Non-utilitygeneratorsthataretypicallynotownedbythenationalelectricitycompanyorpublicutility,andwhichgenerateelectricityforsaleWHOLESALEELECTRICITYMARKETDESIGN69tothenationalelectricitynetwork.IPPscanalsosellpowertoasingle,third-partyviacustomerviaapowerpurchaseagreement(PPA).IPPsmayusethenationalelectricitynetworksdistributionsystemifmechanismsexisttopermitthisorviaaprivatewiredirecttothecustomer.IndependentSystemOperator(ISO):Theentitythatoperatesthetransmissionsysteminrealtimeandistaskedwithensuringnon-discriminatoryaccesstothegridforindividualgenerators.Intradaymarket:Amarketthatsettles/determinesthepriceforone-hourperiodsorlessduringthedayofdelivery.Loadshedding:Thereductionofsystemdemandsbysystematicallyandinapredeterminedsequenceinterruptingtheloadflowtomajorcustomersand/ordistributioncircuits,normallyinresponsetosystemorareacapacityshortagesorvoltagecontrolconsiderations.Locationalmarginalprices(alsonodalpricing):Themarket-clearingpriceforelectricityatthelocationtheenergyisdeliveredorreceived,reflectingcongestion.Marketpower:Theabilityofanymarketparticipantwithalargemarketsharetosignificantlycontroloraffectpricebywithholdingproductionfromthemarket,limitingserviceavailability.Netpool:Amarketinwhichparticipantsintherealtimemarketbidonlytocoverimbalancesbetweencontractedamountsandrequirementsinrealtime.Openaccess:Therequirementforutilitiestoallowmarketparticipantstousetheirtransmissionanddistributionfacilitiestomovebulkpowerfromonepointtoanotheronanondiscriminatorybasis(forafee).Pay-as-bid:Anauctioninwhichpricespaidtowinningsuppliersarebasedontheiractualbids,ratherthanthebidofthehighestpricedsupplierselectedtoprovidesupply(asinuniform-priceauction).Powerpool:Anassociationofenergyutilitiesthatcoordinatetheiroperations(aggregationofpowerfromvariousgenerators,arrangingexchangesbetweengenerators,andestablishingorenforcingtherulesofconductforwholesaletransactions)tomaximizesystemstabilityandachieveleast-costdispatch.Thepoolmayown,manageand/oroperatethetransmissionlines,orbeanindependententitythatmanagestransactionsamongothers.PowerPurchaseAgreement(PPA):Acontractbetweenonepartythatgenerateselectricity(seller)andaparty(usuallyadistributionutility)whopurchasestheelectricity(buyer).Thetermsandconditions(startingdate,duration,priceorpaymentarrangements,deliverypoint,andperformanceterms)arespecifiedinthecontract.Thecontract(agreement)allocatestheriskbetweenbuyerandsellerforrespectivenonperformance.Demandresponse:Demandresponsecompensatesend-use(retail)customersforreducingtheirelectricityuse(load),inresponsetosignalsfromthesystemoperator,duringperiodsofhighprices,orwhenthereliabilityofthegridisthreatened.ThisloadreductioncanUNDERTAKINGREFORM70comefromshuttingoffmachinery,adjustingathermostatsetting,turningonagenerator,orswitchingonabattery.RenewablePortfolioStandards(RPS):Sometimesreferredasrenewableelectricitystandard,RPSisaregulatorymandatetoreachatargetofenergyproductionfromrenewablesourcessuchaswind,solar,biomass,andotheralternativestofossilandnuclearelectricgeneration.Retailcompetition:Competitiongivesretailconsumerschoicesastohowtosatisfytheirpowerneeds,eitherthroughtheincumbentutility,competitiveretailsuppliersor,insomeinstances,directlyfromthegeneratorsorthewholesalemarket.Singlebuyer:Anoftenpubliclyownedentitythatpurchasessomeoralloftheelectricityfromindependentgeneratorsandsellstocustomers.Spotmarket:Atermvariablyusedtorefertomarketsforday-aheadorreal-timeelectricity.Strandedcosts:Coststhatcannotberecoveredduetounexpectedpolicyregimechangesuchastheintroductionofcompetitionornewenvironmentalregulations.Strandedcostsarecalculatedasthedifferencebetweensunkcostsandthepresentvalueofexpectedoperatingearningsfromthosesunkenassets.Unbundling:Disaggregatingcomponentsofapreviouslyintegratedpowercompany.Separatingelectricityserviceintoitsbasiccomponents(generation,transmissiondistribution,andretail)andofferingeachcomponentforsaleisusuallyreferredtoasverticalunbundling.Whengenerationcompaniescontrollargemarketshares,horizontalunbundlingmaybenecessarytocreateacriticalmassofcompetitorsandpreventreconcentrationviamergersandacquisitions.VariableRenewableEnergy(VRE):Renewableenergysourcesthatarenotcontrollable,suchaswindpowerandsolarpower,asopposedtocontrollablerenewableenergysources,suchasdammedhydroelectricityorbiomass,orrelativelyconstantsources,suchasgeothermalpower.Verticallyintegratedmonopoly:Oneutilityownsandcontrolsalllevelsofthesupplychain(generation,transmission,distribution,andsupply),servingadefinedconsumerterritory.ValueofLostLoad(VOLL):Thecostassociatedwithaninterruptionofelectricitysupply(i.e.,theopportunitycostofelectricity).WholesaleElectricityMarket(WEM):Purchaseofelectricityfromgeneratorsforthepurposeofresellingittoothers,whothenselltoretailcustomers.Zonalpricing:Apricingmethodinwhichenergypricesvarybyzoneratherthanbynode.Zonesmaybedefinedbysetsofnodeswhereitisunlikelythatthenetworkwillexperiencecongestion.Congestionwouldthenbemorelikelyappearatinterfacesbetweenzones.WHOLESALEELECTRICITYMARKETDESIGN71BibliographyAndrés,LuisAlberto,J.LuisGuasch,andJordonSchwartz.2013.UncoveringtheDriversofUtilityPerformance:LessonsfromLatinAmericaandtheCaribbeanontheRoleofthePrivateSector,Regulation,andGovernanceinthePower,Water,andTelecommunicationSectors.Washington,DC:WorldBank.Bacon,Robert.2018.“TakingStockoftheImpactofPowerUtilityReforminDevelopingCountries:ALiteratureReview.”PolicyResearchWorkingPaper8460.Washington,DC:WorldBank.Besant-Jones,JohnE.2006.“ReformingPowerMarketsinDevelopingCountries:WhatHaveWeLearned?”EnergyandMiningBoardDiscussionPaperNo.19,WorldBankGroup.Biggar,DarrylR.,andMohammadRezaHesamzadeh.2014.TheEconomicsofElectricityMarkets.Germany:IEEEPressandWiley&Sons.Boiteux,Marcel.1949.“Latarificationdesdemandesenpointe:Applicationdelathéoriedelaventeaucoutmarginal.”RevueGénéraled’Electricite58(August):321–40.Bushnell,JamesB.,andCatherineWolfram.2005.“OwnershipChange,IncentivesandPlantEfficiency:TheDivestitureofU.S.ElectricGenerationPlants.”CenterfortheStudyofEnergyMarkets,UCBerkeley,California,March.Cramton,Peter.2017.“ElectricityMarketDesign.”OxfordReviewofEconomicPolicy33(4):589–612.Cramton,Peter,AxelOckenfels,andStevenStoft.2013.“CapacityMarketFundamentals.”EconomicsofEnergy&EnvironmentalPolicy2no.2.http://www.iaee.org/en/publications/eeeparticle.aspx?id=46.Cretì,AnnaandFulvioFontini.2019.EconomicsofElectricity:Markets,CompetitionandRules.Cambridge,UK:CambridgeUniversityPress.Davis,LucanW.andCatherineWolfram.2012.“Deregulation,Consolidation,andEfficiency:EvidencefromU.S.NuclearPower.”AmericanEconomicJournal:AppliedEconomics4,no4:194–225.Eberhard,AntonandCatrinaGodinho.2017.“AReviewandExplorationoftheStatus,ContextandPoliticalEconomyofPowerSectorReformsinSub-SaharanAfrica,SouthAsiaandLatinAmerica.”EEGState-of-KnowledgePaperSeriesNo.2.1,CenterforEffectiveGlobalAction,UCBerkeley,California.Erdoğdu,Erkan.2014.“Investment,SecurityofSupplyandSustainabilityintheAftermathofThreeDecadesofPowerSectorReform.”RenewableandSustainableEnergyReviews31:1–8.EuropeanCommission.2016.“OverviewofEuropeanElectricityMarkets.”METISTechnicalNoteT4.Brussels:EuropeanCommissionDirectorate-GeneralforEnergy.https://ec.europa.eu/energy/sites/ener/files/documents/metis_technical_note_t4_-_overview_of_european_electricity_market.pdf.Ferrero,Vanessa.2018.“DevelopingCleanEnergyinNigeria:Data-CentricSolutionsforaSolar-HybridCompany.”(MastersProject,DukeUniversity,April27).https://dukespace.lib.duke.edu/dspace/bitstream/handle/10161/16583/Ferrero%202018.pdf.Foster,VivienandAnshulRana.2020.RethinkingPowerSectorReformintheDevelopingWorld.SustainableInfrastructure.WashingtonDC:WorldBank.UNDERTAKINGREFORM72Foster,Vivien,SamanthaWitte,SudeshnaGhoshBanerjee,andAlejandroMoreno.2017.“ChartingtheDiffusionofPowerSectorReformsacrosstheDevelopingWorld.”PolicyResearchWorkingPaper8235.WorldBank:Washington,DC.Galetovic,Alexander,CristiánM.Muñoz,andFrankA.Wolak.2015.“CapacityPaymentsinaCost-BasedWholesaleElectricityMarket:TheCaseofChile.”TheElectricityJournal28(December):80–96.Gassner,Katharina,AlexanderPopov,andNataliyaPushak.2009.DoesPrivateSectorParticipationImprovePerformanceinElectricityandWaterDistribution?Washington,DC:PPIAF,WorldBank.Glachant,Jean-Michel;PaulL.Joskow,andMichaelG.Pollitt.2021.“HandbookonElectricityMarkets.”CheltenhamUK:EdwardElgar.Gratwick,KatherinaNawaalandAntonEberhard.2008.“Demiseofthestandardmodelforpowersectorreformandtheemergenceofhybridpowermarkets.”EnergyPolicy36no.10:3948–60.Guasch,LuisJ.2004.GrantingandRenegotiatingInfrastructureConcessions:DoingItRight.WBIDevelopmentStudies.Washington,DC:WorldBank.Hogan,WilliamW.1998.“IndependentSystemOperator(ISO)foraCompetitiveElectricityMarket.”CenterforBusinessandGovernment,JohnF.KennedySchoolofGovernment,HarvardUniversity.https://scholar.harvard.edu/whogan/files/swit0698.pdf.Huenteler,Joern,IstvanDobozi,AniBalabanyan,andSudeshnaGhoshBanerjee.2017.“CostRecoveryandFinancialViabilityofthePowerSectorinDevelopingCountries:ALiteratureReview.”PolicyResearchWorkingPaper8287,Washington,DC:WorldBank.https://openknowledge.worldbank.org/handle/10986/29077.Hunt,SallyN.2002.MakingCompetitionWorkinElectricity.NewYork:JohnWiley&Sons.IEA(InternationalEnergyAgency).2014.“ThePowerofTransformation.”Paris:OECD/IEA.https://www.iea.org/reports/the-power-of-transformation.IEA.2016.“Re-PoweringMarkets.”Paris:OECD/IEA.IFC(InternationalFinanceCorporation).2020.“ThePowerMarketsDatabase.”https://www.worldbank.org/en/who-we-are/ifc/power-markets-database.IFC.Forthcoming.“CreatingMarkets:PowerMarketsforDevelopment.”Washington,DC:IFC.InternationalEnergyConsultants.2016.“Regional/GlobalComparisonofRetailElectricityTariffs:ExecutiveSummary.”http://corporate-downloadables-tips.s3.amazonaws.com/1478573661.68b4d11ba9cb3ccb30e91c6edd66b6c9.pdf.Jamasb,Tooraj,RabindraNepal,GovindaTimilsina,andMichaelToman.2014.“EnergySectorReform,EconomicEfficiencyandPovertyReduction.”DiscussionPapersSeries529,SchoolofEconomics,UniversityofQueensland,August.Joskow,PaulL.1997.“Restructuring,CompetitionandRegulatoryReformintheU.S.ElectricitySector.”JournalofEconomicPerspectives11,no.3:119–38.Joskow,PaulL.2006.“CompetitiveElectricityMarketsandInvestmentinNewGeneratingCapacity.”MITCenterforEnergyandEnvironmentalPolicyReseach,MassachusettsInstituteofTechnology,June12.https://economics.mit.edu/files/1190.Joskow,PaulL.2007a.“CapacityPaymentsinImperfectElectricityMarkets:NeedandDesign.”MassachusettsInstituteofTechnology,December5.https://economics.mit.edu/files/2095.WHOLESALEELECTRICITYMARKETDESIGN73Joskow,PaulL.2007b.“IndependentSystemOperators.”Presentation,MassachusettsInstituteofTechnology,September28.https://economics.mit.edu/files/1577.Joskow,PaulL.2008.“LessonsLearnedfromElectricityMarketLiberalization.”TheEnergyJournal29:9–42.Joskow,PaulL.2013.“Symposiumon‘CapacityMarkets’.”EconomicsofEnergyandEnvironmentalPolicy2,no2:v–vi.Joskow,PaulL.2018.“ChallengesforWholesaleElectricityMarketswithIntermittentRenewableGenerationatScale:TheU.S.Experience.”MITCEEPRWorkingPaperSeries2019–001,MassachusettsInstituteofTechnology,CenterforEnergyandEnvironmentalPolicyResearch,Cambridge,MA,December18.Joskow,PaulL.,andJeanTirole.2005.“MerchantTransmissionInvestment.”TheJournalofIndustrialEconomics53,no.2:233–64.Joskow,PaulL.,andRichardL.Schmalensee.1983.MarketsforPower:AnAnalysisofElectricUtilityDeregulation.Cambridge,MA:MITPress.Kariuki,Mukami,andJordanSchwartz.2005.“Small-ScalePrivateServiceProvidersofWaterSupplyandElectricity:AReviewofIncidence,Structure,PricingandOperatingCharacteristics.”PolicyResearchWorkingPaper3727.WashingtonDC:WorldBank.Kessides,IoannisN.2004.ReformingInfrastructure:Privatization,Regulation,andCompetition.PolicyResearchReport.Washington,DC:WorldBankandOxfordUniversityPress.Klein,Michael.2015.“Public-PrivatePartnerships:PromiseandHype.”PolicyResearchWorkingPaper7340.Washington,DC:WorldBank.Klein,MichaelandNeilRoger.1994.“BacktotheFuture:ThePotentialinInfrastructurePrivatization.”FinanceandtheInternationalEconomy8:TheAMEXBankReviewPrizeEssays,editedbyR.O’Brien.Oxford:OxfordUniversityPress.Makholm,JeffD.2017.“Institutions,toPropertyRights,toHigh-TechnologyGasMarkets.”NERAEconomicConsulting,October31.https://www.nera.com/content/dam/nera/publications/2017/PUB_Institutions_Property_Rights_Gas_Markets_103117.pdf.Mansur,ErinT.,andMatthewW.White.2007.“MarketOrganizationandMarketEfficiencyinElectricityMarkets.”Mimeo.https://www.researchgate.net/publication/228539500_Market_Organization_and_Market_Efficiency_in_Electricity_Markets.Marcantonini,Claudio,andA.DennyEllerman.2015.“TheImplicitCarbonPriceofRenewableEnergyIncentivesinGermany.”TheEnergyJournal36,no.4:205–39.Martin,Chris,andNaureenS.Malik.2019.“PowerBlowsPast$9,000CapinTexasasHeatTriggersEmergency.”Bloomberg.com,August13.https://www.bloomberg.com/news/articles/2019-08-13/texas-power-prices-briefly-surpass-9-000-amid-searing-heat.Maurer,LuizT.A.,andLuizA.Barroso.2011.ElectricityAuctions:AnOverviewofEfficientPractices.WorldBankStudy.Washington,DC:WorldBank.Metcalf,GilbertE.2010.“FinancingaNationalTransmissionGrid:WhatAretheIssues?”MITCEEPRWorkingPaperSeries2010–015,MassachusettsInstituteofTechnology,CenterforEnergyandEnvironmentalPolicyResearch,Cambridge,MA,October.Munoz,Francisco,SonjaWogrin,ShmuelS.Oren,andBenjaminF.Hobbs.2017.“EconomicInefficienciesofCost-BasedElectricityMarketDesigns.”Mimeo,April18.https://www.researchgate.net/publication/315702822_Economic_Inefficiencies_of_Cost-based_Electricity_Market_Designs.UNDERTAKINGREFORM74Nagayama,Hiroaki.2010.“ImpactsonInvestments,andTransmission/DistributionLossthroughPowerSectorReforms.”EnergyPolicy38,no.7:3453–67.Newbery,DavidM.andMichaelG.Pollitt.1997.“TheRestructuringandPrivatisationofBritain’sCEGB—WasItWorthIt?”JournalofIndustrialEconomics45,no.3:269–303.Olmos,LuisandIgnacioJ.Pérez-Arriaga.2013.“RegionalMarkets.”InRegulationofthePowerSector,editedbyIgnacioJ.Pérez-Arriaga.London:Springer.Oseni,MusiliuO.andMichaelG.Pollitt.2014.“InstitutionalArrangementsforthePromotionofRegionalIntegrationofElectricityMarkets:InternationalExperience.”PolicyResearchWorkingPaper6947.WashingtonDC:WorldBank.Pérez-Arriaga,Ignacio,HughRudnick,andMichelRivier.2009.“ElectricEnergySystems:AnOverview.”InElectricEnergySystems:AnalysisandOperation,editedbyAntonioGomez-Exposito,AntonioJ.Conejo,andClaudioCanizares,1–50.BocaRaton,FL:CRCPress.Petrov,Konstantin.2021.“WholesaleMarketStructuresandPriceFormation.”Tailor-madetrainingprogram,“FundamentalsofEnergyMarkets.”DNV.Pollitt,MichaelG.2020.ReformingtheChineseElectricitySupplySector:LessonsfromGlobalExperience.Cham,Switzerland:PalgraveMacMillan.Rudnick,HughandConstantinVelásquez.2018.“TakingStockofWholesalePowerMarketsinDevelopingCountries:ALiteratureReview.”PolicyResearchWorkingPaper8519.Washington,DC:WorldBank.Rudnick,HughandConstantinVelásquez.2019a.“LearningfromDevelopingCountryPowerMarketExperiences:TheCaseofthePhilippines.”PolicyResearchWorkingPaper8721.Washington,DC:WorldBank.Rudnick,HughandConstantinVelásquez.2019b.“LearningfromDevelopingCountryPowerMarketExperiences:TheCaseofColombia.”PolicyResearchWorkingPaper8771.Washington,DC:WorldBank.Rudnick,HughandConstantinVelásquez.2019c.“LearningfromDevelopingCountryPowerMarketExperiences:TheCaseofPeru.”PolicyResearchWorkingPaper8772.Washington,DC:WorldBank.Schmalensee,RichardandRobertN.Stavins.2012.“TheSO2AllowanceTradingSystem:TheIronicHistoryofaGrandPolicyExperiment.”DiscussionPaper,ResourcesfortheFuture,Washington,DC.https://media.rff.org/documents/RFF-DP-12-44.pdf.Schweppe,FredC.,MichaelC.Caramanis,RichardD.Tabors,andRogerE.Bohn.1988.SpotPricingofElectricity.Boston,Dordrecht,andLondon:KluwerAcademicPublishers.Selten,Reinhard.1973.“Asimplemodelofimperfectcompetition,where4arefewand6aremany.”InternationalJournalofGameTheory2:141–201.Shuttleworth,Graham,andIsabelleMckenzie.2002.“AComparativeStudyoftheElectricityMarketsinUK,SpainandNordPool”.AReportforConfindustria.Rome:NERAEconomicConsulting.Sixel,L.M.2019.“Analysis:TheMurkyandConfusingTexasElectricityMarket.”TheHoustonChronicle,November1.Stoft,Steven.2002.PowerSystemEconomics:DesigningMarketsforElectricity.IEEEPressandWiley&Sons.https://ieeexplore.ieee.org/book/5264048.Tawde,Ajit.2020.“RealTimeEnergyTradinginIndia.”Energycentral.com.June16,2020.https://energycentral.com/c/um/real-time-energy-trading-india.WHOLESALEELECTRICITYMARKETDESIGN75Tenenbaum,Bernard,ChrisGreacen,andDiptiVaghela.2018.MiniGridsandtheArrivaloftheMainGrid:LessonsfromCambodia,SriLanka,andIndonesia.EnergySectorManagementAssistanceProgram(ESMAP)TechnicalReport013/18.Washington,DC:WorldBank.Urpelainen,JohannesandJoonseokYang.2017.“PolicyReformandtheProblemofPrivateInvestment:EvidencefromthePowerSector.”JournalofPolicyAnalysisandManagement36no.1:38–64.Urpelainen,JohannesandJoonseokYang.2019.“GlobalPatternsofPowerSectorReform,1982–2013.”EnergyStrategyReviews23(January):152–62.https://www.sciencedirect.com/science/journal/2211467X/23/supp/C.Vagliasindi,MariaandJohnBesant-Jones.2013.PowerMarketStructure:RevisitingPolicyOptions.Washington,DC:WorldBank.Wolak,Frank.2021a.FinalReportonThematicLine2:TransformationofthePeruvianWholesaleElectricityMarket.Stanford,CA:StanfordUniversity.Wolak,Frank.2021b.“MarketDesigninanIntermittentRenewableFuture:CostRecoverywithZero-Marginal-CostResources.”IEEEPowerandEnergyMagazine19no.1:29–40.WorldBank.1994.WorldDevelopmentReport:InfrastructureforDevelopment.Washington,DC:WorldBank.WorldBank.2013.Implementation,CompletionandResultsReportfortheFirstProgrammaticElectricitySectorDevelopmentPolicyLoanandSecondandThirdProgrammaticEnvironmentalSustainabilityandEnergySectorDevelopmentPolicyLoans.Washington,DC:WorldBank.WorldBank.2013.“InternationalExperiencewithOpenAccesstoPowerGrids:SynthesisReport.”EnergySectorManagementAssistanceProgram.KnowledgeSeries016/13.Washington,DC:WorldBank.WorldBankGroup.2017.LinkingUp:Public-PrivatePartnershipsinPowerTransmissioninAfrica.Public-PrivateInfrastructureAdvisoryFacility.Washington,DC:WorldBank.Zhang,Fan.2018.IntheDark:HowMuchDoPowerSectorDistortionsCostSouthAsia?SouthAsiaDevelopmentForum.Washington,DC:WorldBank.