A new report by the U.S. Department of Energy’s National Renewable Energy Laboratory (NREL) identifies research opportunities to improve the ways in which wholesale electricity markets are designed, with a focus on how the characteristics of variable generation from wind and solar power can affect those markets. The report states that because power systems are planned and operated so that they are closely tied to market designs, improvements in the designs of wholesale electricity markets could also improve the reliability and efficiency of the power system.

Evolution of Wholesale Electricity Market Design with Increasing Levels of Renewable Generation identifies a number of potential market impacts caused by increasing penetrations of variable generation. In North American market design, energy is sold in day-ahead markets and balanced in 5-minute real-time markets.  The team reviewed several historical approaches to meeting two of the most critical and complicated market design challenges: 1) revenue sufficiency for long-term reliability; and 2) providing incentives for short-term operational flexibility. The team also looked at how those approaches have evolved in recent years. According to the report, this evolution is due, in some part, to increased penetrations of variable generation.

Most in the electric power industry agree that these challenges must be met. While there are regional differences, there is a general standardized market design for the nine independent system operator and regional transmission operator market regions in North America. However, there is much debate about the way in which each market has met the challenges and whether or not additional modifications to the market designs are necessary to ensure that the challenges will continue to be met. Within the United States, each market is evolving differently. Some markets have undergone significant changes. Other markets have remained relatively unchanged, possibly because the current design has been determined to have already met these challenges sufficiently. These differences may exist because each system is so different, with various generating portfolios, economies, transmission networks, and regulatory philosophies.

The report examines the ways in which the industry has historically or recently been making changes to wholesale electricity market designs to meet the challenges of revenue sufficiency and flexibility incentives. From this analysis, the team came up with a number of suggested research areas on which the industry should focus on improving the ways in which the markets are designed to meet these challenges.

Although the report presents the two challenges of revenue sufficiency and incentivizing flexibility independently from one another, it also states that these challenges are linked. Flexibility may become the more significant factor for ensuring power system reliability in future systems, and linking reliability requirements between the short term and the long term is crucial. In addition, the way in which revenues and incentives are designed in the short-term markets can dictate how they must be designed in the long-term markets. Maintaining a link between the short-term and long-term incentives and reliability needs, the report says, must be considered when performing this research.