systems such as the current system used in Germany or auction mechanisms that factor in SV such as the Mexican clean energy auctions are examples of how this balance can be achieved.

Market design and planning

A comprehensive change in market design and system planning is needed to accelerate power system transformation.

Wholesale market design

While the presence of competitive wholesale power markets is not a prerequisite for power system transformation, it is an extremely common and highly effective tool for its achievement. Wholesale markets help to open markets to investment, unleash the forces of competition, integrate VRE and reduce system operational costs. While there is no standard design for wholesale electricity markets, several important characteristics are worth noting:

Short-term power trading: Short-term markets are the foundation of all market-based electricity systems, and have been proven to be a valid approach to cost-effective integration of high shares of VRE in Europe and parts of the United States. Short-term markets play a critical role in mobilising the flexibility of the power system, and can support the integration of VRE.

Economic dispatch and rapid trading: Arguably, the shift towards economic dispatch – which enables resources to compete based on their short-run marginal cost – is the single most important market design aspect for supporting the 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 also critical. For example, in Europe trading on intraday markets on the day of delivery is gaining importance for improved integration wind and solar power.

Cross-regional trade in electricity: The benefits of regional power system integration and trading cut across all aspects of the power sector, including: improved security of supply; improved system efficiency; and improved integration of variable renewable resources. These benefits generally derive from the increased optimisation of generator dispatch. For example, the close interconnection and trade with neighbours is the most relevant tool for wind integration in Denmark.

Markets for flexibility services: Reliable operation of the power system critically depends on a number of system services to provide flexibility, which contribute to maintaining system frequency and voltage levels, as well as balancing a power system with increased variability and uncertainty in the supply–demand balance. As the penetration of VRE increases, the need for such services – and hence their economic value – is bound to increase. Establishing market structures to incentivise the provision of flexibility resources and services is an important task for policy makers in the transformation process. For example, Ireland is introducing a comprehensive reform of system services to deal with very high proportions of VRE.

Clean energy investment framework: A crucial aspect of market design is ensuring that clean generation resources have an appropriate investment framework to facilitate their continued growth in line with policy targets. As mentioned, market premium systems in Germany and the Mexican auction design include measures to balance investment certainty with maximising SV.

Pricing of externalities: Price-based instruments aim to internalise the societal costs of environmental degradation, climate change or air pollution – caused by energy production – in the planning and operation of electricity generators according to the

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polluter pays principle. Price-based instruments can achieve environmental targets in a cost-effective way. However, they should be part of a coherent policy package. For example, the European emissions trading system has been updated several times to deliver an effective price signal that is well-linked to other policy instruments.

Retail market design

The opportunity of digitalisation and the rise of DER have broad implications for power system transformation in the retail electricity market segment. Relevant dimensions, and examples of them, in the retail market include:

Tariff reform to encourage system-friendly investment in and utilisation of DER:

Making time-of-use tariffs accessible to a wider array of consumers may be a useful way of encouraging improved use of DER, including demand response and rooftop solar.

Promoting digitalisation and connectivity in various retail customer segments: One prerequisite for visibility and control across the power system is the availability of appropriate real-time monitoring systems with bidirectional communication across grids, loads and generation. Sweden has implemented a comprehensive roll-out of smart meters in support of power system transformation.

Enabling technology neutrality for the provision of power system flexibility: For a successful transition, a level playing field is crucial to allow advanced DSR and storage to contribute to system services and power system flexibility. System services markets in Europe have been reformed to allow participation of storage and demand response.

Establishing procedures for open and secure access to power system data: Greater monitoring and computing capabilities present a great opportunity for constant improvement of power system operation and the development of new business models for DER in the retail segment. Allowing access both to power sector participants and researchers may assist policy makers in identifying new areas of opportunity to pursue. Denmark has recently established a data hub for better access and availability of smart meter data.

Upgraded planning frameworks

Power sector planning is an inherently complex process due to the long planning horizon and is subject to a range of drivers that are highly uncertain. Traditionally, the primary focus of power sector planning was on expanding supply infrastructure (generation, transmission and distribution networks) to meet projected electricity demand, based on assumptions of economic growth over the next 20 to 30 years. However, with the changing landscape of the power sector, due to increasing deployment of VRE and other new technologies such as DER, as well as increasing consumer participation, planning for a future power system needs to become more sophisticated – it needs to take into account the role and impact of these developments. Several important characteristics of upgraded power system planning frameworks are worth sharing:

Integrated generation and network planning exercises: Historically, generation, transmission and distribution planning processes have been conducted independently in separate processes. However, as the level of VRE deployment increases, there is an increasing need to co-ordinate and integrate generation and network planning exercises in order to avoid transmission congestion in areas with the highest-quality VRE resource, and to plan a system that utilises VRE resources with the highest SV.

Incorporation of demand-side resources into planning exercises: The potential role of the demand-side resources, such as DSR and energy efficiency, is often overlooked in

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