IEEE Power & Energy Magazine - January/February 2021 - 54

The decarbonization of end-demand segments (e.g., heating,
transport, and industry) will also require significant investment, and
appropriate energy policy initiatives will need to be developed.
carried by flexible fossil-fueled conventional generators
(mainly gas), which are required to produce significantly
less energy (as low operating cost and CO2-free renewable
and nuclear generation are prioritized in the merit order) and
operate part loaded with frequent startup and shut-down
cycles, with devastating effects on their cost efficiency.
Furthermore, the decarbonization agenda is also envisaged to affect the demand side, mainly through the electrification of segments of the transport, heating, and cooling
sectors that are currently heavily reliant on fossil fuels.
However, this electrification is expected to yield a disproportionately higher increase in peak electricity demand levels
than the associated increase in the overall electrical energy
consumption due to the temporal patterns in the usage of
vehicles and heating/cooling appliances. This implies that
capital-intensive investments in new generation capacity
and network reinforcements will be required, and this new
infrastructure will be significantly underutilized. Considering these challenges, as the decarbonization initiatives further develop, the utilization of the generation and network
infrastructure is constantly reducing, and the total electricity
system costs are dramatically increasing.
Beyond the technical challenges associated with increasing balancing requirements and peak demand levels driven
by the decarbonization of the European energy system, there
are growing challenges associated with the design of electricity markets. The key market challenges include a) the
" merit-order effect " of renewable generation and the resulting " missing money " problem faced by the generation side;
b) the integration of variable renewable generation in energy
and ancillary services markets; c) the design of effective

carbon emissions markets; d) the capture of the full system
value of distributed flexibility in energy and balancing markets; and e) the geographical integration of different market
segments, including the development of a harmonized panEuropean market and the coordination of emerging local
energy markets. This article aims at providing evidence of
these challenges in the European setting, reviewing European policy initiatives to address them, and identifying
open issues toward developing innovative electricity market
designs to enable the cost-effective and secure development
of a highly decarbonized European electricity system.

The Need for a Radical Change of
Electricity Market Design

Beyond setting ambitious carbon reduction targets, the EC
remains committed to a deregulated electricity market paradigm, according to which the investment and operation of
the generation, demand, and energy storage components are
driven by competitive markets encapsulating profit-driven
market participants. This implies that both the large-scale
integration of low-carbon generation as well as the realization of the system benefits of flexibility resources will have
a significant impact on the current market dynamics and
require a fundamentally new market design.
The most fundamental feature of this new market design lies
in shifting the focus from the operation timescale and the shortrun marginal cost of the system toward the investment timescale
and the necessary capital investments to support the decarbonization agenda, as qualitatively illustrated in Figure 1. Under a largescale integration of renewables, the short-run marginal cost and
consequently the prices in the energy market will be massively
reduced due to the very low (nearly
zero) marginal production costs
of these resources; this is widely
2020
2030
Low-Carbon
Capacity
known as the merit-order effect of
Investment
Market
Capacity
renewables. On the other hand, the
Costs
Market
value and prices of ancillary services
Energy
will be increased by an order of magMarket
nitude, mainly due to the higher balEnergy
Low-Carbon
ancing requirements driven by the
Market
Investment
variability of renewables.
Costs
Despite the controversy around
capacity markets, their size is also
expected to grow in the next decade
Ancillary Services
Ancillary Services
due to the increasing need to remunerate and recover the investment
costs of conventional generation,
figure 1. A qualitative illustration of market evolution.

54	

ieee power & energy magazine	

january/february 2021
IEEE Power & Energy Magazine - January/February 2021

Table of Contents for the Digital Edition of IEEE Power & Energy Magazine - January/February 2021
