Policy, market and regulatory frameworks for power system transformation

Policy, market and regulatory frameworks for power system transformation

This chapter discusses the basic requirements for policy, market and regulatory frameworks to support the cost-effective and reliable transformation of power systems. It is structured under five main sections. The first uses the six characteristics of variable renewable energy (VRE) introduced in the previous chapter to derive basic principles that system operation and market design need to follow to unlock flexibility. The following sections then discuss the implementation of these principles in three main areas: wholesale markets, retail markets and distributed energy resources, and system planning. A final section presents transition mechanisms for the gradual introduction of innovative frameworks. The objectives are to provide a comprehensive overview of the different areas in which policy, market and regulatory frameworks need to be adapted to facilitate power system transformation, and to provide relevant international experience in these areas.

Basic principles to unlock flexibility

The six basic properties of VRE (low short-run costs, variability, uncertainty, modularity, location constraints, non-synchronous technology) directly imply a number of fundamental principles for appropriate power system operation and market rules (IEA, 2014a):

Low short-run marginal cost – System operation should prioritise generation with low short-run costs in order to minimise fuel costs. Where markets are in place, bids from generators should generally reflect short-run marginal costs. Where such mechanisms are not in place, growing inefficiencies and renewable energy curtailment will result at rising shares of VRE.

Variability – System operation needs to be planned and executed at small time increments. For example, the schedules for interconnectors should be planned at the sub-hourly level. Where markets are in place, this implies a greater importance for high temporal resolution of price signals, i.e. prices are valid only for short time periods. In addition, VRE will cover a varying share of power demand and this share may change rapidly over a few hours (for example, during sunrise). System operation practices need to allow for large changes in operational patterns over shorter periods. Where markets are in place, this implies the increased importance of allowing large differences in prices, i.e. allowing for larger shortterm price volatility.

Uncertainty – Available VRE supply is only known with high accuracy a few hours ahead of generation. Hence, system operators need to be able to change planned operations very close to real time. Forecasts need to be matched to relevant timescales in a power system, e.g. the start-up times of power plants. Where markets are in place, this raises the importance of short-term price signals, i.e. prices formed close to real-time that take into account current system status.

Location constraints – Mismatches between supply and demand may occur across large geographic regions (locational constraints). System operations need to efficiently balance supply and demand across large areas, making best use of available infrastructure. Where markets are in place, this increases the importance of enabling efficient trading across large

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