Principles for power markets and security of supply

The development of renewable energy sources in Europe intensifies the need for a flexible power system. In the past, large central power stations matched electricity production to demand, but today fluctuating supply from renewables requires the system to be managed in new and different ways. This is an essential precondition to maintaining the currently high standards of security of supply. It all hinges on the design of the power market and how security of supply can be provided in the most efficient way. This is why the future principles of the power markets in many EU member states are currently being discussed. One of the most important levers for effectively and efficiently providing power security is the cooperation of neighbouring countries. The “Pentalateral Energy Forum”, an initiative of Austria, Belgium, France, Germany, Luxembourg, the Netherlands and Switzerland has intensified its activities with an eye on power supply security. Moreover, the forum is currently discussing conditions for an optimised set of rules to provide a base for future cooperation between electricity markets. In its “Impulse Paper” Agora Energiewende takes a closer look at the options for such a set of principles. The publication deals with design options for day-ahead and intraday markets, as well as designs of balancing markets and capacity markets. It also takes into account the need for technical flexibility in future power markets. The paper highlights four findings:

• Security of supply does not only mean “How much capacity do we have?” but also “What kind of capacity?” The power system of the future requires a mix of flexible resources.
• Security of supply should be evaluated across borders. This reduces costs and the need for flexibility.
• Reforming the energy only market (EOM 2.0) makes sense in any case (“no-regret measure”). The reform helps to reduce flexibility requirements, and makes it possible to better calculate the economic value of flexibility measures.
• If security of supply is to be addressed through capacity mechanisms, the main focus must be on the technical capability of these capacities.

The paper was produced by power market experts at the Regulatory Assistance Project (RAP) on behalf of Agora Energiewende.