IEA urges nations to reinvent energy markets to meet green targets

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Courtesy: Asian Development Bank

Nations need to reinvent their energy markets through a new balance between regulation and competition to ensure sustainability and supply security as they move towards low-carbon targets, the International Energy Agency said.

That requires efficient markets which unlock flexibility to deal with renewables’ variability as well as weather forecasting errors and network congestion, it said in its ‘Re-powering Markets’ report.

Drawing on the Agency’s review of best practices in electricity market design, mainly in Europe, the United States and Australia, the study offers guidance to governments, regulators, companies and investors on how to transition to low-carbon generation, it said in the statement.

The report said that electricity markets are undergoing massive transformation, as the push for low-carbon power generation shifts the industry towards high investment in renewables and other new technologies even as demand stagnates or declines in many countries.

That requires efficient markets, which are best achieved by introducing prices that reflect supply and demand conditions as often as possible and as close as possible to locations where the energy is generated or consumed, the IEA said, adding that markets are adopting technology that allows such pricing, including day-ahead, intraday and real-time trading, as well as by zone to stimulate cross-border trade.

“The detailed price information needs to be transparent to communicate the cost of electricity in specific circumstances as well as the relative value of different forms of electricity generation so that all participants, even from neighbouring markets, learn where and when to operate and invest.”

Furthermore, the IEA said, efficient markets unlock flexibility to deal with renewables’ variability, like when and where the wind does not blow or the sun does not shine – or when and where wind and solar generation is abundant – as well as weather forecasting errors and network congestion.

Besides efficient markets, the shift to a low-carbon energy system requires a robust carbon price to help reveal the right value for various technologies, the report said, adding that is part of the regulation with long-term arrangements that is necessary to attract investments in a timely manner and at the scale required. Investors, governments and consumers all have to share the risks in the transition to ensure efficient and lowest-cost evolution.

More than just generation is at stake, the report said, pointing out that networks, too, are critical: improving and expanding power grids, including across borders, helps ensure successful integration of higher shares of wind and solar power as well as increases energy security.

“Proper governance is necessary to see the bigger, often transnational, picture critical to a modern electricity system: options examined in the book include transmission auctioning. Regulation of distribution must also be modernised to take into account the potential of batteries as well as consumers who also produce renewable electricity,” it said.

As the markets evolve, though, shortages of capacity can result in scarcity prices. While these prices are critical to incentivise generators to produce as well as to get consumers to reduce demand, the report makes clear the need for an adequate regulatory framework during hours of capacity shortage.

Besides looking at price spikes, the report also examines other ways regulators can cope with the huge uncertainty of decarbonisation pathways and policies, including capacity mechanisms that pay for maintaining adequate generation to meet politically set reliability standards. It also details the opportunities that demand response offers through dynamic pricing and the pooling of consumers through new technologies, including the impact of increased electrification from widespread adoption of electric cars and other new technology.

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