Adapting Market Design to High Shares of Variable Renewable Energy

Liberalised electricity markets require timely adaptation to support higher shares of variable renewable (solar and wind) energy and distributed power generation. This study from the International Renewable Energy Agency (IRENA) presents the latest knowledge on the adaptation process for such markets, aiming to inform policy makers, regulators and system operators on the options available.

This report is also available in Japanese (日本語).

The report analyses challenges and solutions, and provides recommendations, on how to adapt electricity market design to high shares of variable renewable energy.  It focuses on two aspects of liberalised power systems:

• Wholesale market design;
• Distribution networks and distributed energy resources.

Among its findings, the report recommends reinforcing the design of short-term markets, balancing markets, and long-term investment signals.

• Adapting short-term (day-ahead and intra-day) markets requires improving their temporal and spatial granularity, increasing the detail of bidding formats, and strengthening the link between energy and reserve markets.
• Adapting balancing markets (designed to maintain system stability and reserves) involves redefining traded products, recognising the contribution of variable renewables to grid stability and avoiding dual-imbalance pricing.
• Long-term mechanisms, which guide the expansion of power generation according to the strategic views of governments, should allow mature renewable technologies to compete with other generation technologies, by ensuring that support and capacity mechanisms take environmental externalities into account and minimise distortions in short-term and balancing markets for electricity. 

Distribution companies should be incentivised to adopt a more active role in network planning and operation, along with implementation of smart grids. The report also emphasises the importance of decoupling distribution remuneration from the volume of energy distributed, and calls for shifting the goal of regulation from investment adequacy alone to a broader set of performance indicators. Renewable electricity self-consumption can be increased by adopting cost-reflective retail tariffs and supporting the deployment of advanced metering technologies. Distribution companies would take on a new role as market facilitators and distribution system operators, interacting more closely with other agents, including transmission system operators and aggregators.

Building on case studies from advanced markets, the report identifies the policy and regulatory measures needed to accommodate variable and decentralised renewables, while ensuring high standards of efficiency, reliability and environmental stewardship.