The Decarbonised Electricity System of the Future: The ‘Two Market’ Approach

Electricity markets are broken; they no longer fulfil their primary functions of providing appropriate signals for producers and consumers.  The problem arises from a combination of changes in technology (from predominantly marginal cost plants to predominantly capital cost plants) and of policy (support for intermittent renewable plants) which undermine traditional market structures.  In the view of the authors, markets will require fundamental reform to resolve the problem.  Existing market structures are inevitably leading to greater central intervention – support for renewables and the creation of capacity markets.  There needs to be a shift in emphasis which will enable consumer preferences to be expressed clearly and drive overall market development.  The reforms needed will require not just a change in market design but also in consumer attitudes to electricity – this will necessitate a relatively simple and comprehensible basic offer at consumer level.

Against this background the authors propose a new approach to market design which will enable intermittent renewable sources to be accommodated; maintain overall system reliability while enabling consumers to put a value on their own supply security; provide clear signals to generators for investment and operation; and provide an ‘exit strategy’ allowing government intervention to be limited in the long run to the setting of framework conditions only.  In the view of the authors, no other proposal put forward to date can meet all these objectives.

By: Malcolm Keay , David Robinson

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