Guiding the transition: design challenges in decarbonizing electricity markets

Most liberalized electricity systems are founded upon energy-only market principles
which aim to ensure affordable electricity prices. Since the early days of liberalization, it
has been questioned whether interactions between market participants, offering and
purchasing electricity, provide sufficient investment incentives for safeguarding supply
security. Additionally, and as consequence of the global consensus to drastically
reduce carbon emissions, future electricity generation must meet decarbonisation
objectives. We argue that market interventions are possibly inevitable to meet these
three main objectives of electricity systems: capacity adequacy, emission avoidance
and affordability. Results from a case study demonstrate how changing policy
scenarios require additional market mechanisms with significant interdependencies
among each other. Here we show how a policy criterion which is not perfectly aligned
with the main system objectives, like renewable generation targets, is suboptimal to
comply with the main objectives. Furthermore, we challenge the premise of cheap
green electricity for everyone since the remuneration of additional services increases
the total system cost.