Additional considerations for markets, policies, regulation and planning

a number of these options in the past years. However, there are additional possibilities to enhance the system integration of renewables by use of deployment policies. As explained in detail in this report, the fundamental idea behind such approaches is to maximise the value of VRE for the power system.

Electricity has more or less economic value depending on where, when and how it is produced. It is most valuable at times when demand levels approach the limits of available generation and (depending on the exact conditions on the grid) when it is generated close to demand. In addition, if a power plant can provide system services, it will also be more valuable compared to a plant that cannot provide such services. Of course, VRE generators cannot influence how much wind and sunshine is available at given times and places. However, it is possible to build VRE plants in different locations and optimise their design to maximise the value of the VRE fleet. Price signals can play a decisive role in incentivising VRE generators to design and operate plants in a more system-friendly way.

Spot markets can be a very useful tool for providing appropriate signals to VRE developers and operators. By exposing VRE plants to the varying prices on the spot market, they can be encouraged to build power plants that generate as much as possible at times and in places where electricity is valuable – and where prices are higher than average. However, such approaches need to strike a balance between creating such an incentive for system-friendly deployment while also providing sufficient investment certainty. Different forms of financial hedging arrangements and/or market premiums can achieve this objective.

Advanced design of wholesale markets, including markets for system services, is an important tool to accelerate power system transformation.

Establishing a basic spot market that allows for short-term trade across large geographic regions is a fundamental tool for co-ordinating the operation of diverse power system assets, both renewable and conventional. Many countries have further refined and enhanced such markets to optimise the operation of their power system. Measures focus on moving gate closure closer to production times (e.g. via shorter trading windows in intraday markets), improving markets for system services and establishing capacity remuneration mechanisms.

Growing shares of VRE increase the importance of tools to balance supply and demand at short timescales. These include measures to balance forecast errors a few hours before real-time operation, large changes in output that occur over a few hours to minutes and rapid fluctuations from minutes to seconds. In addition, new measures can be required to ensure system stability to withstand disturbances such as the loss of a large generator or transmission line. In some cases, new services may need to be defined and remunerated, such as the ability to respond very quickly to frequency changes (fast frequency response).

Reforms are also crucial for unlocking the participation of new providers of such system services, notably demand-side response and storage providers. They usually include changing prequalification requirements (allowing smaller units to participate, reducing the minimum time that resources need to guarantee the service and procuring resources closer to real time). In addition, changing product definitions can lead to optimised outcomes. For example, separating downward and upward reserve provision can help the entry of new players: demand response can often reduce demand most easily at short notice (providing upward reserves) and VRE can more easily and economically provide downward reserves (by reducing its output).