IEEE Power & Energy Magazine - November/December 2015 - 61

MAN WITH ARROW-©ISTOCKPHOTO.COM/RYANKING999, PHOTO COURTESY OF NREL

RENEWABLE ENERGY WAS NOT THE INITIAL JUSTIFICATION FOR ELECTRICITY
markets, but it is rapidly becoming a driver for new markets and market design changes. Starting in 1982 with market reforms in Chile, competition has been introduced into wholesale
electricity markets around the world. This trend is likely to accelerate with countries such as
China planning a major restructuring of power systems that could result in electricity markets.
Most electricity markets were initially designed with the assumption that thermal or hydro
plants would provide the bulk of the services. Now, however, market operators realize that variable renewables [wind energy and photovoltaic (PV) solar energy], as well as other new types
of resources such as distributed energy, storage, and demand response, can impact the market
outcomes and needs for various market products. Furthermore, operators continually recognize
the need to reform these markets to better incorporate the characteristics of novel technologies since how a market is designed can have a huge influence on the ease of integrating those
resources. Poor market designs can dramatically impact the power grid in terms of increased
costs, degraded reliability, or increased gaming or competition issues. On the other hand, good
choices can provide an open, transparent, and level playing field, facilitating efficient system
operations and an easier transition to a market increasingly dominated by new technologies.
We consider a future where a high level of our electricity is generated from variable
renewable resources, such as wind and solar PV technologies. In this future, what market
design changes may be needed? Are there system services that we need to procure that were
never considered in the market previously? How will spot markets, which currently set prices
based on the variable cost of energy, function with such an abundance of zero-variable-cost
resources? Can resources required for long-term adequacy, but run very infrequently, produce
enough earnings to remain in business? Can distributed resources participate in bulk markets
alongside central resources?
Our discussion has several dimensions that may initially look like distinct problems. While
increasing amounts of variable renewables will clearly alter market outcomes, it is not always
obvious whether significant changes warrant reforming the market design. It is possible that
market dynamics are adjusting appropriately to a changing resource mix and the design remains
sound (i.e., higher prices may be a result of an increasing need for a service). In other cases,
variable renewables may highlight weaknesses in market designs that can be improved. In this
article, we hope to show that the complex and interrelated goals of ensuring reliability at least
cost to consumers and in a fair and transparent manner can be unified through intelligent market design. We do not claim to have all the answers to these questions, but we do present some
of the challenges for integrating more variable renewable resources into the electricity markets.

Designing a Market
for High Levels
of Variable Generation

Renewables-Catalyst for Change

Although the designs of electricity markets differ between
regions and countries, they share many common elements.
For example, wholesale energy prices are typically based
on the marginal cost of providing energy. Many system
services (also called ancillary or reliability services) are
also traded so that the transmission system operator can
satisfy operational reliability requirements by selecting
the least-cost offers. Many markets, but not all, also have
explicit market mechanisms intended to provide clearer
and more transparent incentives for the construction of new power plants for long-term resource
adequacy. Hence, the design of electricity markets is closely aligned with short-term system
operations as well as long-term planning. This link between short- and long-run decisions is
crucial, especially when integrating new technologies such as variable renewable generation.
To maintain reliability, a bulk power system requires its resources to provide several distinct
services. Numerous operating reserves, for instance, are used to maintain frequency of the
interconnection, minimize area control error of a regional balancing area, and manage transmission power flow on the system to within normal and contingency limits. Meanwhile, the
system also needs to manage reactive power to maintain local voltage and black start service to
provide for recovery during restoration periods. The list goes on.

november/december 2015

ieee power & energy magazine

Table of Contents for the Digital Edition of IEEE Power & Energy Magazine - November/December 2015