EU-SysFlex blog: Three policy recommendations from the impact analysis of market and regulatory options in the pan-European power system through advanced power system and market modelling

29.07.2020News

European 2030 Climate and Energy Policy Framework set an EU target of at least 32% for the share of renewable energy in the final energy consumption in the EU in 2030. This translates into electricity consumption originating from at least 50% renewable energy sources [1]-[4]. As RES have an uncertain output and a highly variable production pattern, new technical challenges arise in the pan-European electricity system. In order to maintain the security and stability of the system, new and innovative system services may be required, new service providers need to have a route to the market, and novel remuneration mechanisms and innovative market designs have to be explored.

EU-SysFlex’s Work Package 3 focused on the analysis of market design and regulatory options for innovative system services that can help address the challenges associated with the integration of very high levels of variable renewable generation. Within the work package, Task 3.4 analysed how different market designs play out across different operational timeframes and power system configurations, while at the same time considering both the short- and long-term impacts of these designs on the pan-European power system. A wide variety of models was used, ranging from UC/ED to game-theoretic and agent-based models. The research involved following partners: Imperial College London (UK), KU Leuven/EnergyVille (Belgium), National Centre for Nuclear Research (Poland), University College Dublin (Ireland), and VITO/EnergyVille (Belgium).

Analysis focused on four main areas of research: (1) market and regulatory design, (2) market behaviour, (3) geographical aspects, and (4) investment effects. Within each area, number of specific topics were addressed (see graph below). Interestingly, across these areas, the research pointed to several common conclusions, and related policy recommendations, which are highlighted at the end.

The analyses on market and regulatory design pointed to two main areas of innovation that could facilitate renewable integration. First, a more short-term operation of system service markets, notably reserve markets, can partially offset the costs of maintaining reliability and security in the face of high shares of variable renewables. More frequent reserve sizing and procurement allows for the use of improved forecasts, while increasing the temporal resolution of reserve markets allows for more cost-efficient, dynamic sizing of reserves. Second, a diversification of system service suppliers, notably through the opening up of reserve provision to renewables, storage and flexible load, can further improve market performance and cost-efficiency of power system operation. This second area of innovation is bolstered by the first, as the shorter-term market operation boosts the potential to participate of non-traditional suppliers, further promoting technology neutrality.

The analyses on market behaviour showed that the introduction of storage and flexible load can result in an overall reduction of market power and, hence, in a higher market efficiency, mostly irrespective of the location of the flexibility. It further pointed to the increased importance of technical constraints for market power dynamics. Existing models used to study market power typically lack an adequate representation of such constraints. As such, there is a need to update and improve the tools with which such dynamics are studied, as we move towards a power system in which the importance of flexibility, and hence the market power potential of those who have it, increases.

Focusing on geographical aspects and the locality of system services, the research concluded that vertical and horizontal coordination will be crucial. The former points to TSO-DSO coordination, required to maximise the synergy of using distributed resources to provide multiple services and to manage possible conflicts in priorities between these actors. The latter points to TSO-TSO coordination, such as cross-border coordination of reserve markets. This can lead to a more cost-efficient power system operation, both directly through more cost-efficient reserve procurement, and indirectly through enabling increased generation from cheaper sources, such as less flexible conventional and renewable technologies.

Finally, analyses concerning investment effects demonstrated how the inclusion of new (needed and valued) system services alter the optimum plant portfolio, and how new system services markets, if designed and regulated appropriately, can send clear long-term signals to investors. In the absence of such markets, sub-optimal portfolios will be obtained, which can increase operating costs and CO₂ emissions with increased renewable energy curtailment due to insufficient flexibility at certain times. Adequate investment in flexible technologies should be incentivised through strong investment signals via stable markets for the new system services.

Across these four areas of research, three common conclusions arose that have clear implications for policy. First, the research shows unequivocally that improvements in market design can facilitate the sustainability transition.Closer-to-real-time markets reduce the need for flexibility while allowing for a diversification in the supply of flexibility. The integration of new system service suppliers can improve the cost-efficiency of power system operation. Increased coordination, both vertical and horizontal, becomes even more crucial for cost-efficient operation. Second, to unlock these benefits, several design and implementation challenges have to be overcome. Markets will be more complex, as they operate shorter-term and integrate more participants, products and geographies. This leads to more complex cost-benefit-sharing exercises, notably for operational and investment costs incurred by regulated actors. It also calls for more complex market oversight and regulation to address new potential market power effects and ensure that markets are sending sufficiently stable investment signals. Third, it is crucial to act sooner rather than later. The impact of not updating market designs and regulations increases as the renewable shares do. This makes the pursuit of partial design improvements worthwhile, e.g., starting to integrate and bring those markets closer to real time for which it is easier to do so. This message is reinforced by the insight that is the mid-term future that presents challenges. In the long-term, energy market signals could drive sufficient investment in flexibility by themselves. In the mid-term, however, there may be insufficient returns and associated investment signals for flexibility while the need for flexibility steadily increases.

Find the full executive summary of the research conducted in Task 3.4 here.

References:

[1] Elia, “Adequacy and flexibility study for Belgium 2020 – 2030,” 2019.

[2] European Commission, “Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions – A policy framework for climate and energy in the period from 2020 to 2030. COM(2015)15 final.” 2014.

[3] European Council, “European Council (23 and 24 October 2014) Conclusions, EUCO 169/14, CO EUR 13, CONCL 5,” 2014.

[4] EU-SysFlex consortium, “EU-SysFlex – System operation and flexibility solutions for integrating 50 % renewables by 2030.” p. 24, 2018.

 

Written by: Gwen Willeghems (VITO/EnergyVille) and Arne van Stiphout (KU Leuven). VITO is Work Package 3 Leader and KU Leuven is Task 3.4 Leader.