Electricity market designs and flexibility

Rapid increase of varying renewable-based electricity with low marginal cost is challenging the practices applied in electricity markets. This report focuses on how the electricity markets can be organised so that flexibility is efficiently tackled, i.e. market design. Thus, instead of technological means, attention is paid to a question on how market system could contribute the flexibility need and supply. According to the report, current advanced electricity market designs offer possibilities for trading flexible resources to some extent. Furthermore, many of the shortcomings identified in current market designs seem to relate to general characteristics of electricity markets. Thus, making explicit conclusions on adequate market design for flexibility is challenging. However,capacity mechanisms, increasing flexible components in market systems and fundamentally novel type of market solutions are discussed as potential directions for addressing flexibility in market design. Despite often presented solution for shortcomings of current market design during the last few years, according to the report, traditional capacity mechanisms seem to have been designed to tackle the fundamental shortcomings of electricity markets such as lack of price-responsive demand, limitations in storing the product, and vulnerability to market power during times of high demand. Thus, it is seen possible that only relying on traditional capacity mechanisms may not be adequate for tackling the flexibility question. For increasing flexible components in competitive electricity markets, well-known measures include improvements in intraday and realtime markets, more efficient and dynamic prices, higher geographical or temporal resolution, capacity prices, and demand response participation. Whereas all these measures have potential to contribute in addressing flexibility, the highest attention is paid to analysis of novel type of two-market system presented by Keay (2016), which is fundamentally designed to address the flexibility issues in current operational environment. Especially, its applicability in Nordic electricity market is considered. We present a thought experiment of how a separate intermittent renewable market, basically a wind power market in the Nordic system, could be made to work using mainly the tools and market structures of the Finnish and Nordic market we have already today. The basis for this alternative is to split the markets with a firewall and have a Wind System Operator managing the wind market. The main point is to let all end-users in the wind market purchase the production at a discount, but at the same time directly be balance responsible.