Hybrid electricity markets with long-term risk-sharing arrangements: adapting market design to security of supply and decarbonisation objectives

Authors

Fabien Roques, Dominique Finon

Abstract

The re-emergence of policy interventionism in electricity markets raises questions as to how market design can best be adapted to meeting the investment challenge associated with security of supply (SoS) and decarbonisation objectives. This paper takes an institutionalist approach in terms of modularity of the market design, and reviews the standard historical approach towards competitive markets, in order to analyse the roles and interactions of the initial and additional market “modules”. We argue that a number of additional modules is required to achieve long-term policy objectives, such as decarbonisation and security of supply (SoS). But, in turn, they destabilise the initial modules of the market design, in particular by the entries of renewables. We review the international experience with hybrid market design and draw a number of policy recommendations at to best practices, as well as suggesting ways in which the initial market modules can be improved to prevent inconsistencies with the new modules. The move towards a hybrid market regime, which relies on a combination of planning, long-term risk sharing arrangements and improved markets entrenched in a function of short-term coordination, appears to be unavoidable where decarbonisation policies are adopted.