Evolution of Wholesale Electricity Market Design with Increasing Levels of Renewable Generation

Date Published: September 2014

Authors: Erik Ela, Michael Milligan, Aaron Bloom, Audun Botterud, Aaron Townsend, Todd Levin

This report provides a comprehensive review of wholesale electricity markets and how the introduction of variable generation (VG) has impacted these markets. The paper considers VG’s impacts on market schedules and prices, ancillary service markets, Financial Transmission Rights markets and forward capacity markets. These impacts are analyzed in relation to two particular issues related to market design: (1) revenue sufficiency for long-term reliability and (2) incentivizing flexibility in short-term operations. For the first issue, the report reviews two primary existing market mechanisms for providing revenue sufficiency: scarcity pricing and forward capacity markets. Then it introduces changes to the market design such as how scarcity prices are calculated and the implementation of an operating reserve demand curve. For the second issue, the report defines “power system flexibility” as “the ability of a resource, whether any component or collection of components of the power system, to respond to the known and unknown changes of power system conditions at various operational timescales.” The paper reviews existing mechanisms to incentivize flexibility in short-term operations, and looks at newer market mechanism proposals such as new ancillary service market designs and implementation of flexible ramping products. In the end of this report, a list of research topics on the two major challenges are specified.

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