IEEE Power & Energy Magazine - January/February 2021 - 21

Revisiting Market Regulation
and Design

The New Market Paradigm
Under the New Conditions

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The key motivation behind the liberalization of power sectors and the introduction of wholesale market mechanisms
was to transfer the responsibility of investment decisions
from public administrations to market agents, expecting
that competition in generation would spur efficiency and
drive wholesale energy prices down. Moreover,
competition would remove the responsibility of planning from governments as
single decision makers whose
errors have massive con-

january/february 2021

sequences and leave capacity expansion decisions to the market agents, thus shifting the consequences of planning errors
from the consumers to those who make the decisions.
The principal idea was to " let the market " decide what, when,
and how to invest in new generation resources. However, reality
has contradicted this original premise. There is a growing consensus among power sector regulators worldwide that markets
need regulatory mechanisms that protect and complement the
expansion processes.
Since the introduction of markets, significant progress has
been made on the wholesale competition front. Short-term
energy and ancillary services markets, built upon mid-20th
century economic dispatch-optimization modeling tools,
have worked reasonably well under the designs that characterized power system liberalization during the 1990s and
early 2000s. However, the context and perspectives for the
future have dramatically changed. Now the complexity
and uncertainty of the capacity expansion problem
are much larger because of the following:
1) On the supply side, the diversity of technological alternatives is unprecedented.
2) On the demand side, the load for conventional uses is decreasing while, at
the same time, it is expected that the
whole economy is going to be gradually electrified at an uncertain level
and pace.
3) For the first time, end users are starting
to have the means not only to respond to
short-term price signals but also make
their own investment decisions.
These developments raise questions about whether
current market designs can be improved to provide short- and
long-term price signals able to support an efficient and comprehensive system-wide operation and expansion of the
power system, leading to an optimal portfolio of utility scale
and distributed generation, storage, and demand-response
resources consistent with public policy goals. In this context,
governments worldwide have reversed the original expressed
intention of letting the market determine investment decisions.
Subsidies for renewable energy sources (RESs) have guided
a significant part of the investments in generation in the last
decade, many competitive bidding tenders and capacity remuneration mechanisms are being implemented, and even direct
and centralized key energy-planning decisions are being made.
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IEEE Power & Energy Magazine - January/February 2021

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