Well-functioning electricity markets can be an efficient tool for balancing supply and demand, coordinating operational decisions and signalling investment needs. As electricity systems transform to accommodate a broader range of technologies and growing power demand, effective market designs for secure operations and timely investment are essential, according to a new IEA report released today.
The report - Electricity Market Design: Building on strengths, addressing gaps - looks at how wholesale market designs and the policies that complement them are performing across Europe, the United States, Japan and Australia, and provides insights on how they can adapt to changing system needs. It finds that while short-term markets have performed well in supporting efficient and secure electricity dispatch, long-term markets have been less effective in meeting investment and risk-management needs.
Complementary mechanisms, such as capacity remuneration schemes and renewable support programmes, have played a significant role in advancing investment and policy objectives, but in some cases their design has contributed to system inefficiencies and higher costs, the report says.
Across the markets analysed, electricity has been securely supplied more than 99.9% of the time over the past five years. Short-term markets have been broadly effective in maintaining reliable and efficient operations even as systems become more complex. They have enabled efficient scheduling, transparent price formation and broad participation across a diverse set of resources and actors. In Europe, for instance, the day-ahead market processes more than 400 000 bids every hour across thousands of registered actors.
Long-term markets, however, suffer from low liquidity across most of the regions analysed. This limits how easily market participants can find opportunities to protect themselves against short-term price risks. In forward and futures markets, most trading happens no more than 2 years ahead of electricity delivery, far short of the horizons of 10 to 30 years typically required to finance new capital-intensive projects. Overall, long-term market gaps make it harder for market participants to manage price risks over the time frames needed for investing in new generation, storage and electrification projects.
For needs that markets alone cannot meet, complementary mechanisms provide targeted support to bring forward new investment and maintain essential existing capacity. Across many regions, they have helped advance policy objectives such as resource adequacy and emissions reductions targets. These mechanisms have become a structural feature of electricity markets, helping to deliver large-scale, low-emissions generation and retain dispatchable and flexible resources which may operate less frequently with rising shares of variable renewables, while remaining essential for system security.
Overall, the report finds that short-term markets have managed to remain effective, and their strengths should be preserved while refining their designs to reflect the needs of more dynamic and distributed systems. Long-term markets have shown several gaps, undermining investment conditions and risk management. Many market participants would benefit from reforms that increase the liquidity, duration and accessibility of long-term markets.
The report underscores the importance of taking a holistic view of wholesale electricity market design. The analysis highlights the benefits of evolving market designs and emphasises the need for transparent and predictable reform processes to maintain stakeholder confidence and support effective implementation.
