Challenge #3: Energy Markets and communist shops: The need for resource neutral energy market designs in Europe

Jessica Stromback, FifthVolt

It is better if you have a lot of places to sell a product, better yet if when one store shuts another opens.  This is as true of the energy from distributed resources as it is of bananas or beans.  Yet today, while retail stores are set up to allow many locations to sell commodities (such as bananas and beans) – the energy markets are often monolithic. These ‘markets’ were historically designed around 1-3 incumbent players, owning large centralized power plants and their designs have yet to allow for actual competition between either resources or players. Indeed these clumsy market designs resemble centralized communist shops more than modern retail outlets.  They provide one thing to buy, in one size, from one place.

In order to facilitate the energy transition through competition, bringing in renewables, batteries, Demand Response etc. – European energy market designs must be modernized. They must not only allow in distributed resources (a minimum standard many fail to achieve) but they must become technology neutral and facilitate competition from multiple resources. This would allow flexible low carbon resources to become established and provide valuable environmental and social benefits.

Yet, despite the slow progress, today there are positive examples of flexible market designs under development around Europe, examples can be found in Austria, France, Belgium, Ireland, the UK and the Nordics.  These examples should be used to indicate a robust and viable path forward toward full integration of distributed resources.

The most successful markets in Europe contain frequent auctions, short duration times, small loads and proportional, resource appropriate participation criteria. These key success factors foster low carbon distributed resources participation and are repeatable and appropriate across the EU Member States.

Below are a few key structures found in such markets:

Bidding into multiple markets: Flexibility resources are able to bid into multiple markets.  For example, the flexibility resources provided by a battery can earn availability payments from a reserve market with a 2 hour call time, and still be allowed to bid into the balancing and frequency markets, which all have shorter call times.  In this way, if a resource is not needed in one market, they can participate in another and maximise both their benefits to society and their own earnings.

Frequent auctions: Frequent auctions are beneficial for distributed resources, such as batteries and Demand Response.  The implications of a frequent auction are practical – for example, a hotel can bid in more load the week that they know their hotel will have available resources, rather than have to promise a full amount for a full year.  A daily or hourly, auction will allow even greater precision and consideration of weather, occupancy…   

Short call duration The short call duration means that distributed resources can participate with greater convenience, as they do not have to, for example, generate, turn off their machinery, heating, cooling … for long periods of time.  TSOs who hold frequent auctions, usually also reduce call duration to allow for participation.

Pay as Cleared: This means that all market participants are paid the clearing price for the market, even those that would have provided resources for less.  This has medium and long-term benefits as the low-cost resources multiply, gradually lowering the clearing price.

 

Use the good examples: As mentioned, today many markets are still designed around the needs of centralised generation units only. These designs exclude and/or lower the value of distributed resources, blocking innovation and artificially raising prices through a lack of competition. These market designs remain biased against decentralized resources, (one thing to buy, in one size, from one place).

Successful, future-oriented markets adjust their designs to be as technology neutral as possible, allowing for the vibrant growth of low carbon solutions in an accessible, competitive European marketplace.  Within the last 2 years, improved market designs are emerging and/or are under pilot in the several EU Member States, these can and should be copied and expanded across Europe going forward. Technology neutral market design is the basis of competition – without it, competition cannot foster innovation or the energy transition – we will only repeat the past.

 

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