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Executive summary: The impact of electricity market design on infrastructure investment

This technical brochure details the findings of Cigré Task Force C5-7.1. In 2007, the task force began studying the relationship between market design and generation adequacy, with three objectives in mind:

  • Gathering information on the investment incentives that exist in various market designs
  • Reporting on actual and planned investment results in established markets and correlation to market incentive structure
  • Investigating relationships and tradeoffs between various investment models and market designs

 

C5-7.1 used two information sources to achieve these objectives: a wide-scale survey to obtain data from developing and mature economies (survey results gathered in 2007 and again in 2008-2010) and a collection of case studies, each focusing on a given market (gathered from 2009-2010).

The technical brochure first draws from the survey results to explore the issues of generation adequacy in a market environment and generation adequacy and market design. It then outlines the case studies and ends with conclusions from both sources of information. 

Analysing generation adequacy in different markets

Market reforms have been introduced in many electricity sectors worldwide for the purpose of improving generation adequacy. The analysis takes a look at the effects of such reforms in the following mature and developing economies:

  • Mature economies: Western-Australian market, Australian National Electricity market, Belgium, France, Israel, Norway, Ontario, PJM (USA), Portugal, Czech Republic, United Kingdom, Japan, Midwest ISO (USA), NY ISO (USA), Southwest Power Pool (USA), Northern Ireland, Republic of Ireland
  •  Developing economies: South Korea, Iran, ESKOM (South Africa), Brazil, Colombia, SING (Chile), SIC (Chile)

These are also the economies analysed in the case study section of the study.

The task force hypothesised that, following the introduction of market reforms, capacity margins would typically decrease in mature economies and increase in developing economies. However, the analysis of the survey results did not completely support these expectations.

On average, capacity margins in developing economies did seem to increase following market reforms. This is true for Brazil, but less clear for South Korea and Iran, while capacity margins in South Africa are clearly decreasing. In terms of mature economies, some - such as France - saw their capacity margins decrease. For most markets, however, there is no clearly observable downward trend, and some countries exhibited a notable increase in capacity margins.

There are several reasons for the discrepancy between the analysis and expectations. One is that ‘real’ demand is not yet fully playing its proper market role. This is partly due to a lack of widespread demand-side infrastructure, such as ‘smart’ or ‘real time’ meters that enable demand response and thereby facilitate demand-side participation in the market. From this perspective, the task force considers that all markets are more or less still in transition.

Exploring generation adequacy and market design

The study distinguishes between two types of markets: those with a regulatory generation capacity mechanism and those that are ‘energy only’.

Most markets have a regulatory generation capacity mechanism of some sort. Capacity mechanisms fall broadly into one of two categories. The first is one where the regulator sets a price for generation capacity and lets the market determine the amount of available capacity (i.e., capacity payments). The second is one where the regulator sets the amount of capacity that must be available and then allows the market to determine the price (i.e., capacity requirements or obligations).

Energy‐only markets have no such additional support scheme for generation capacity (as in Portugal and Belgium, for example). At the very least, these systems have an implicit regulatory safeguard. For some markets, the safeguard is that the incumbent, still under (partial) public control, “shares the regulator’s concern” about system reliability. In other markets, the authority has the explicit possibility to intervene via a tender when shortages are forecasted.

The task force compared the expected evolution of capacity margins for energy-only markets and markets with a capacity payment or obligation. At first glance, the data suggest that markets with a capacity payment or obligation have outperformed energy-only markets since 2004. However, the average margin for the second group of markets is strongly influenced by the high margins in the Irish and Chilean markets. Treating both Irish markets as a single market and treating the SING and SIC markets in Chile the same way, would alter the results and the conclusion: energy-only markets would outperform the markets with supportive measures.

The survey data do not provide a clear conclusion about which market design is superior. Markets are often still in transition or not yet fully open. Furthermore, it is difficult to gauge the impact of other factors, such as increased import capacity and support for renewable energy sources. Nevertheless, the survey results helped to identify a broad range of market designs. The results also led to the observation that several of the theoretical market concepts have been implemented, albeit sometimes slightly differently. 

Case studies

The task force retrieved case studies from markets in Europe, Latin America, North America and Australia. Structured by a general framework of guiding questions, the case study approach allowed for more detailed analysis of different market mechanisms. ile several markets have a vision on how to deal with generation adequacy and are undertaking measures to improve the situation, each market has unique features. Historically, European markets are usually organised as energy-only markets, but are today also considering and implementing other designs. The Australian National Electricity Market reports a well functioning energy-only market. Market designs in Latin America (Chile, Colombia and Brazil), often build on long-term auctions to ensure sufficient generation investments. The PJM market in North America illustrates the careful fine-tuning of an evolving design. The changes in Ontario, however, demonstrate the difficulty of installing a credible market design.

Overall, the task force did not come to any straightforward, concrete conclusions: it appears that there is no single recipe for success in terms of market design.

 

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