Market Design for a High-Renewables European Electricity System

Date Published: August 2018

Authors: David Newbery, Michael G.Pollitt, Robert A.Ritz, Wadim Strielkowski

This paper presents a series of policy suggestions for the market design of a future European electricity system with the stated targets of European governments – significantly increasing renewable energy’s share of the generation mix. After reviewing the evolution of liberalized electricity markets and EU renewable energy and climate policy to date, the paper summarizes the key market impacts of variable renewable energy to date. The authors then set out six economic principles for wholesale market design and use these to develop their policy recommendations. The principles include correcting the market failures in current market designs as directly as possible, allowing for appropriate cross-country variation in market design, using price signals and network tariffs to reflect the value of all electricity services, collecting network fixed costs in as efficient and equitable a way as possible, de-risking low-carbon investment, and retaining the flexibility to respond to new information on the attractiveness of different low-carbon technologies. The paper’s analysis covers the value of interconnection and market integration, electricity storage, the design of renewable energy support mechanisms, distributed generation and network feed-in tariffs, the pricing of electricity and flexibility as well as long-term contracting and risk management.

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