Report on electricity market design to support the development of flexibility in EU power systems - an analysis of best international practices

The views expressed in this report are the views of the authors only and do not necessarily represent the views of Compass Lexecon, its management, its subsidiaries, its affiliates, its employees or its clients.

In a report commissioned by Amazon Web Services and supported by the Regulatory Assistance Project, a Compass Lexecon team analysed a range of case studies from different countries exemplifying successful market designs and regulatory support schemes to foster the deployment of low-carbon flexible assets. This review of best practices was used to identify a number of potential market reforms to ensure efficient and timely deployment of flexibility in Europe’s power systems.

Situation

As the European Union (“EU”) substantially increased its decarbonisation and renewable deployment targets in order to meet climate change mitigation pledges and alleviate the impact of the energy crisis triggered by Russia’s invasion of Ukraine, its common electricity market is undergoing deep structural changes. To integrate an ever-increasing share of variable electricity from renewable energy sources while phasing out fossil-fuelled thermal power plants, substantial investments in flexible resources will be required in upcoming years to maintain security of supply and operate the power system at the lowest cost.

Our Role

In this paper we analyse how electricity market design and contracting mechanisms can foster the development of flexibility resources needed to help the EU meet its net zero targets while maintaining reliable power system operations. We review several international cases, and conclude that fostering the development of flexibility in Europe should rely on three key market design principles:

1. Principle 1: Address barriers to the participation of flexible resources in different markets. The market design and regulatory framework should be set so as to allow all types of resources to participate across all markets – in particular market eligibility and technical participation rules should not create barriers for distributed resources.

2. Principle 2: Ensure that the market design adequately reflects the full value of flexibility for the power system. The different markets and products should address the full spectrum of power system needs as well as technical capabilities of flexibility resources and allow an efficient stacking up of revenues across markets.

3. Principle 3: A de-risking contractual and regulatory framework to support timely investment in flexible resources. Ensuring the long-term predictability of revenues through de-risking regulatory and contractual mechanisms anchored in a forward looking assessment of the system flexibility needs plays an important role to support the timely development of flexibility and meet the rapidly increasing system needs.

Outcome

Overall, we highlight the key principles of a sound market design but conclude that there is no ‘one-size-fits-all’ market design approach for European countries to foster the development of flexibility resources. The investment needs and appropriate investment mechanisms for flexible resources vary across countries and regions, reflecting differences in power system needs.

The team

The Compass Lexecon team was headed by Fabien Roques, and included Charles Verhaeghe, Florian Bourcier, Augustin Lorne, and Simon Malleret.

View the report here.