New IEA Report: Regulation, Pricing Must Keep Pace with Technology Deployment to Achieve Rapid Scaling of Clean Power

The International Energy Agency (IEA) is out with an important new report, “Re-powering Markets: Market design and regulation during the transition to low-carbon power systems.” This is notable for being “the first official publication of the IEA that analyses the electricity market framework for low-carbon power systems.” Among other things, the report “offers guidance to governments, regulators, companies and investors on how to transition to low-carbon generation” as “the push for low-carbon power generation shifts the industry towards high investment in renewables and other new technologies.” It’s a lengthy (246-page) report, filled with detail, and is well worth reading if you have the time. For now, here are a few highlights.

  • The power sector is “at the core of efforts to reduce carbon dioxide (CO2) emissions,” with the electricity sector in 2014 accounting for “just under 40% of primary energy consumed” and 42% of energy-related CO2 emissions in the OECD countries.
  • “Competitive electricity markets are being challenged by the need to decarbonise electricity production,” as the “intensity of electricity needs to fall from 411 grams per kilowatt hour (g/kWh) in 2015 to 15 g/kWh by 2050 to achieve the goal of limiting the global increase in temperatures to 2°C.” In the IEA’s view, “While many studies conclude that this is both technically and economically feasible, reaching this goal calls for new power market designs.”
  • The goal is to achieve a low-carbon electricity system as rapidly as possible, “at least cost, while maintaining electricity security.” This will require, among other measures, “the incorporation of carbon and support policies into a consistent electricity market framework.” In other words, while competitive markets are important and powerful, they will require a variety of policy measures to support and supplement them.
  • Carbon pricing? According to the IEA, scaling up low-carbon investment in as rapid and cost-effective a manner as required implies the need for “a high and robust carbon price.” This is because “low-carbon investments are capital intensive” and because “this cost structure does not fit well with short-term marginal costs due to carbon price risk and fossil fuel price risk.”
  • Regulatory regimes need to change significantly. “The old regulatory paradigm designed to deliver kilowatt hours from a centralised system in a unidirectional fashion with meters read only once a year is unlikely to unleash the real-time flexibility that new technologies promise and that the new low-carbon power system will require. If regulatory regimes, market design and system operation end up lagging behind technology deployment, the result may undermine electricity security and, ultimately, the low-carbon transition itself.”
  • Constant evolution in market design will be required. “There is no definitive answer to the question of what a ‘perfect’ market design will look like once electricity is low-carbon. Instead, improvements in market design are likely to be evolutionary, reflecting interactions between technologies and market rules.”
  • Demand response and power storage need to be maximized. “Until now, price response has mainly been limited to large consumers participating directly in wholesale electricity markets. This situation is changing with decarbonisation and the development of new technologies….New information and automation technologies allow small consumers to contribute to a more flexible and less costly electricity system, responding to wholesale price variations.” Along with demand response, storage has “the potential to transform traditional electricity markets.”
  • Investment in electricity transmission is important both for clean energy scaling. “Despite the increase in distributed energy resources, transmission remains a cost-efficient means to ensure the integration of high shares of wind and solar power. In addition, the transmission grid remains essential to secure electricity supply. “
  • Distributed energy resources (DER) need to be maximized and fully integrated.  “Regulation of distribution networks has to be modernised to accommodate the deployment of distributed energy resources (DER) such as solar photovoltaics (PV), storage, electric vehicles (EVs), heat pumps, micro-turbines and demand response. New distribution models require greater investment in information technology and have higher operating expenses (OPEX) but less capital investment in wires and transformers (CAPEX) than the traditional model.”
  • Other types of investors may need to supplement or replace traditional utilities. “Utilities in many OECD countries have experienced a change of fortune: from being healthy, profitable and low-risk investments during the 2000s, they are today regarded by the financial community as high risk and unprofitable…The traditional role of large diversified utilities is, in principle, to manage the risks associated with electricity markets. If they are decreasingly in a position to fulfil that role, low-carbon investments will increasingly have to come from other investors with different risk appetites.”