IEEE Power & Energy Magazine - January/February 2021 - 28

regulatory challenges can be categorized along three major
interrelated lines.

Redesign of Short-Term Market Mechanisms
The variability and low marginal operating costs associated with intermittent generation at scale lead to significant
changes in energy market price dynamics. In this context,
storage and eventually demand response appear as important tools to maximize the value of RES generation. The
short-term market design needs to allow for the efficient and
comprehensive integration of such technologies to reward
flexibility and accurate forecasting while enhancing liquidity and transparency. Specific issues include, for instance,
operating reserve demand curves or intraday and very shortterm pricing mechanisms. Auction rules in these mechanisms should be further developed to allow for a level playing field among all technological alternatives, accounting
for their new operational constraints without segmenting the
market. For better integration of small-scale resources, new
market design solutions are required for the participation of
independent flexibility aggregators, while at the same time
guaranteeing efficient interplay with retailers.

Minimizing Market Distortions
With recent renewed interest in integrated resource planning
to achieve decarbonization, it is important to explore ways to
reduce the distortions of the regulatory design mechanisms
to guide new investments. Examples include explicit and
implicit technology subsidies, CRMs, mandated long-term
contracts, and new RAB models applied to certain technologies. This effort requires, for instance, a shift in focus
from pricing energy to pricing capacity as well as replacing
administratively determined subsidy levels with competitive
price discovery methods. Additionally, as the expansion of
state regulation continues, more fundamental changes are
likely to be required in the institutions that determine entry
and exit decisions.

Tools for Efficient Behavior of End Users:
Market Participation and Retail Rates
Electricity end users have an unprecedented degree of choice.
Well-designed price signals are instrumental for the efficient
deployment and management of distributed energy resources,
electric vehicles, smart appliances, and energy management
systems. Yet electricity users invariably face rates and other
incentives that offer them little guidance on how their myriad
choices affect the cost of electricity provision. Significant
developments are still pending, primarily of two types.
1) New market processes need to be developed to properly involve end users in current wholesale market
mechanisms (from capacity to regulation markets).
End users need to be efficiently exposed to granular
price signals (for example, transitioning from the
widespread use of plain volumetric tariffs and the
current socialization of imbalance costs), while at
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the same time avoiding inefficient arbitrage opportunities with dynamic retail rates. Significant efforts are also needed to find ways to coordinate the
role of aggregators and retailers to avoid undesired
cross subsidies.
2) End-user retail rate making also requires a modification from pricing energy to pricing capacity as well
as equitably designing fixed charges needed to avoid
inefficient self-supply.
These regulatory developments should be accompanied
by a redesign of the current institutional and governance
framework. Revitalized institutions are necessary to independently inform integrated resource planning as well as
collect fixed charges to pay for short-term products and services provided by energy and network suppliers.

For Further Reading
" RAB model for nuclear consultation on a RAB model for
new nuclear projects, " Department for Business, Energy &
Industrial Strategy, United Kingdom Government, London,
2019. [Online]. Available: https://www.gov.uk/government/
consultations/regulated-asset-base-rab-model-for-nuclear
" Final report of the sector inquiry on capacity mechanisms report from the commission, " European Commission,
Brussels, Belgium, SWD(2016) 385 final, Nov. 30, 2016.
[Online]. Available: https://ec.europa.eu/energy/sites/ener/
files/documents/com2016752.en_.pdf
I. Herrero, P. Rodilla, and C. Batlle, " Evolving bidding
formats and pricing schemes in U.S. and Europe day-ahead
electricity markets, " Massachusetts Institute of Technology,
Cambridge, MIT-CEEPR WP-2020-010, June 2020.
W. W. Hogan, " Electricity scarcity pricing through operating reserves, " Econ. Energy Environ. Pol., vol. 2, no. 2,
pp. 65-86, 2013.
" Renewable energy auctions: Status and trends beyond
price, " International Renewable Energy Agency, Abu Dhabi,
2019. [Online]. Available: https://www.irena.org/publications/
2019/Dec/Renewable-energy-auctions-Status-and-trends
-beyond-price
K. Neuhoff, N. Ritter, and S. Schwenen, " Bidding structures and trading arrangements for flexibility across EU
power markets, " in Proc. Future Power Market Workshop
2015, Ofgem, London, June 26, 2015. [Online]. Available:
http://hdl.handle.net/10419/111922

Biographies
Carlos Batlle is with the MIT Energy Initiative, Cambridge,
Massachusetts, USA, and the Florence School of Regulation,
Florence, Italy.
Pablo Rodilla is with Institute for Research in Technology, Comillas Pontifical University, Madrid, Spain.
Paolo Mastropietro is with Institute for Research in
Technology, Comillas Pontifical University, Madrid, Spain.

p&e
january/february 2021

https://www.gov.uk/government/consultations/regulated-asset-base-rab-model-for-nuclear https://www.gov.uk/government/consultations/regulated-asset-base-rab-model-for-nuclear https://ec.europa.eu/energy/sites/ener/files/documents/com2016752.en_.pdf https://ec.europa.eu/energy/sites/ener/files/documents/com2016752.en_.pdf https://www.irena.org/publications/2019/Dec/Renewable-energy-auctions-Status-and-trends-beyond-price https://www.irena.org/publications/2019/Dec/Renewable-energy-auctions-Status-and-trends-beyond-price https://www.irena.org/publications/2019/Dec/Renewable-energy-auctions-Status-and-trends-beyond-price http://hdl.handle.net/10419/111922

IEEE Power & Energy Magazine - January/February 2021

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