Time for a market upgrade? A review of wholesale electricity market designs for the future

Abstract

Existing wholesale electricity market designs are poorly suited to address challenges associated with the evolving resource mix. For example, recent scarcity events in the United States show that reliability challenges in renewable- and gas-dominated electric power systems arise not from the lack of generation capacity to serve peak customer demand, but from the lack of available capacity to provide the requisite energy at times of need. We review 11 proposed electricity market designs for the clean energy transition and compare them based on 10 criteria. Enhancing reliability in electric power systems with a significant amount of variable renewable energy requires incentivizing resource flexibility, both in investment and in operation. Electricity market structures should allow resources needed for reliability to earn adequate revenues to recover their variable and fixed costs. Good market designs also enable low-cost financing to support investments in capital-intensive resources that are instrumental in meeting decarbonization objectives. An additional property of well-designed markets is promoting short-run efficiency by reducing incentives to exercise market power and supporting efficient renewable curtailment outcomes. Besides achieving reliability, long-run efficiency, and short-run efficiency, some proposals in our review seek to achieve energy affordability objectives and integration with clean energy goals. Our evaluation highlights several open questions and directions for future research: the determination of mandatory purchase obligations of load-serving entities and associated enforcement mechanisms; the interplay between long-term hedging requirements and incentives for demand participation in real time; and the compatibility between long-term contract design and efficient operations in short-term energy markets.