may include more complex product definitions and mechanisms to cover certain aspects of long-term resource adequacy. One example is capacity remuneration mechanisms (CRMs), where generation and other resources (demand-side response, efficiency, storage) are remunerated for their contribution to long-term system reliability. CRMs can be implemented in different forms, ranging from a strategic reserve kept largely outside the regular electricity market to a fully-fledged additional market (see IEA [2016a] for details).

Economic dispatch and rapid trading

Arguably, the shift towards economic dispatch is the single most important market design aspect for enhancing integration of VRE. Because VRE shows large variability across time and has very low short-run cost, rapid trading of electricity, close to real time, is critical.

Technical constraints call for a certain degree of forward planning and scheduling with regard to system operation. In practice, however, many power systems tend to lock in operational decisions far more in advance than technically required, sometimes weeks or even months ahead. For example, long-term contracts between generators and consumers may prevent power plants from providing flexibility. Such a situation is undesirable for least-cost system operation, in particular at high shares of VRE penetration. In regions where the share of VRE is on the rise, steps have been taken to improve the trading arrangements for electricity close to real time.

For example, in Europe a number of steps are being taken to improve the functioning of intraday markets. In Germany the functioning of these markets has been systematically improved over recent years. As a first step, Epex Spot introduced the ability to trade 15-minute and 60-minute blocks of electricity on the intraday market, a higher level of granularity than the 60-minute contracts on the day-ahead market. This has allowed intraday trade to more accurately reflect the ramping up and down of solar photovoltaic (PV) generation during morning and evening hours. While trading was originally continuous (supply and demand matched as soon as possible), auctions were introduced in 2015 to improve market functioning (supply and demand offers are collected and then matched in groups). As a result, the volumes traded on the intraday market have increased substantially over the past five years (Figure 18).

Given that VRE forecasts are more accurate closer to real time, power plant schedules should ideally have the option to be updated accordingly. Otherwise, a power plant that may be technically capable of supplying flexibility may be prevented from doing so due to a binding schedule that is based on outdated information. Where power plant schedules are determined by trade on a power market, the term “gate closure” refers to how close to real time generation schedules can be changed (without changing the plant-specific bids of market participants).

In the United States, the Federal Energy Regulatory Commission (FERC) passed a new rule in June 2016 that aims to improve the trading of electricity closer to real time (FERC, 2016). FERC now requires US independent system operators (ISOs) and regional transmission organisations (RTOs) to settle real-time markets at the same resolution as the dispatch of the system.30 Historically, market participants were sometimes only allowed to submit price offers that were valid for a full hour, while the actual adjustment of power plant operations was performed on a five-minute basis. This meant that it was not possible to update bids according to new information close to real time. The new ruling removes this mismatch, mandating that the length of the settlement period be the same as the dispatch interval. The same principle is

30 These are the California ISO (CAISO), ISO New England (ISO-NE), Midcontinent ISO (MISO), New York ISO (NYISO), PJM and Southwest Power Pool (SPP). FERC does not have jurisdiction over the Electricity Reliability Council of Texas (ERCOT).

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