Reforming electricity markets: A global perspective

Global expert in energy market reform, Todd Bessemer, questions whether the dramatic increase of non-synchronous renewables onto energy systems across the globe requires a greater focus on capacity retention and reliability incentives to ensure an orderly transition to a reduced carbon system.

Bessemer, who was a lead advisor to EirGrid and SONI when the Single Electricity Market was established on the island of Ireland from 2005 to 2007, has advised on energy markets in over 15 countries spanning four continents.

He believes that the ‘soft-landing’ mechanisms utilised in traditional energy markets provide useful lessons management of the dramatic increase of renewables in an orderly manner, rather than the observed trend in some parts of the world of market reform through crisis resolution.

The evolving nature of ‘market reform’

Bessemer explains that the term “market reform” has evolved from the early days of deregulation. Then, reform centred on the introduction of competition, necessitating changes to industry structures, the introduction of market trading, and changes to related arrangements to support competition. Now, “market reform” is about the changes required to support government policy regarding environmental and resource mix outcomes.

“This still involves changes to market arrangements, and the processes to support these, but now it also involves significant externalities in the form of subsidies and support mechanisms to bring renewables to market, and we have little in the way of structural reform going on,” he explains.

Challenges in the operational timeframe

This evolution is raising significant challenges. Previously, classical generation was considered to provide a market commodity in the form of electrical energy, which could be sold in both real-time and ahead timeframes. Various market-procured and non-market system/ancillary services existed, such as reserves, reactive power, and black-start capability, and a range of assumptions could be made, not least, that demand was mostly passive but predictable. Distribution-level activity could be homogenised and represented as load, and locational challenges were ‘simplified’ from the market, as an issue for the TSO to address. Some “services” were provided implicitly as a bundled part of energy provision, such as dispatchability, rate-of-change of frequency, voltage waveforms, and flexibility.

Outlining a “new world” in relation to energy markets, Bessemer says that the evolving resource mix means that fewer resources are now able to provide those previously implicit services.

“As we get more resources coming onto the system that are both unpredictable in their output and non-synchronous, we are finding fewer resources are left in the system that can provide these services. This was not a problem when there was low non-synchronous penetration, but becomes a substantial issue at higher penetration levels. “We now need to look at how we explicitly incent the provision of these services, and this is a challenge globally, not just in Ireland,” he says. “Market constructs must evolve to properly compensate those providing the key technical attributes required to operate the system.”

The market reform expert says that demand will need to shoulder more of the balancing and system services burden. As a result, distributed energy resources (DER) become a key part of the mix. This also requires that “the ‘where’ and not just the ‘what’ must be better addressed by the market”.

The need for product review and maintenance

Bessemer believes that all of these factors are driving a need for an active culture of product review and maintenance amongst spot markets, explaining that futures markets have long had the concept of ‘product maintenance’; an active review of and modifications to product specifications as the market evolves.

Bessemer notes three key market design principles to guide this evolution. Quoting Larry Ruff, he says that “a market should be as simple as possible, but no simpler”. The market should keep as much activity in the primary energy market as possible; and markets should incent the attributes desired, not specific technologies.

The reality of how this is playing out in current markets globally is that while a range of new system services are being defined in various markets, such as fast-frequency response and firming products, they are happening outside the energy market. “The number of providers for those products is often small which creates liquidity issues and potential market power problems,” says Bessemer. “On top of that, they are often services where you have a monopsony buyer in the form of a TSO versus a plurality of demand. Is it a true market when you have only one buyer?”

Changes are being made to incent for more dynamic performance in markets. In Australia and the competitive markets of the US, five-minute settlement has been mandated to address ramping problems. More granular pricing is occurring worldwide, and flexibility markets are emerging in Europe, though there seem to be a range of definitions for the scope and products of these.

The energy markets expert explored one potentially interesting implication of more active demand-side participation – that it could create explicit cross-market price linkages between power systems, even if no interconnection exists. “Consider disparate regions that are electrically remote from each other. Now consider that these are connected by global data connections. We know that we have less controllable generation, so that is going to force demand to more often be the flexible part of the balancing equation and, increasingly, demand will become the marginal price setter.

“In many of the markets I am involved in, we are seeing that, increasingly, data centre load is particularly displaceable across geographic regions. Data centres tell us that their energy costs are typically higher than their data costs. It is likely then that the price in one region will guide whether to displace processing load to another. “In time, this may create an explicit cross-market price linkage, where load displaces from the east coast of the US to Europe or Asia, or vice versa. If that is the marginal resource, then we are actually going to see linkages between prices, even though there is no electrical interconnection between these markets.”

Challenges in the investment timeframe

Turning to the challenges facing market reform in the investment timeframe, Bessemer says that ‘new’ locations of renewables are driving a lot of non-market costs, particularly on the transmission side. Associated with this is an increase in transmission queues, with TSOs coming under increasing pressure to accelerate the connection process, and prioritise projects that may have joined the queue later but are likely to be ‘shovel ready’ sooner.

Bessemer points to the creation of competitive renewable energy zones as a potential solution to the geographic challenge, which has enabled TSOs in some regions to batch up projects.

A further challenge discussed by Bessemer is that renewables subsidies are often not well coordinated with system security needs. Most renewables still require subsidies – in the form of portfolio standards/RECs, emissions permits, tax credits – to be ‘investable’. These subsidies create significant economic externalities, which suppress energy and capacity prices. This has sent a lot of traditional generation tumbling out of the system earlier than planned or desired due to loss of revenue, inducing scarcity, and others to cut back on maintenance, impacting reliability. For example, recent data from the AEMO’s 2023 Electricity Statement of Opportunities showed that every state in Australia is now projected to breach the reliability standard in the next few years unless serious corrective action is taken.

Where is the transition in ‘The Transition’?

However, corrective actions tend to be reactive rather than proactive and, as countries around the world move to delay planned retirements of some traditional generation in the name of security of supply, Bessemer poses the question: “Where is the transition in ‘The Transition’?”

“When we first set up electricity markets, we put a lot of thought into making sure that we had a ‘soft landing’. We recognised that participants may not fully understand these things initially, and so we put in place mechanisms like vesting contracts and phased retail competition to ensure that no one lost their shirt on day one.

“However, it appears that much of this thinking is lacking in the energy transition. As we move to ever higher levels of non-synchronous renewables, where are the incentives to retain capacity, and incent the reliability attributes needed, until a point of stability has been reached? Where is the soft landing?” he concludes.