Regulation for integration

Following the 2020 editorial line, this month we are dealing with a regulatory challenge: how to adjust the market to a 100% renewable system. So, we have interviewed Pedro Linares, Professor at ICAI Engeneering School and Director of BP Chair for Energy and Sustainability. 

Is the present regulatory framework of the electrical market compatible with a 100% renewable system?

In theory, it could be compatible, but in practice it would be difficult. An energy-only market like the present one could indeed be compatible with the development of a low variable cost and variable production energy, such as renewable energy. But in this scenario, the demand must play a more active role and risks should be eliminated with long-term contracts and back-up energy. The problem is that, due to a lot of reasons, demand will not play that role, so the intervention of a regulator will be necessary to create energy, capacity or flexibility markets in the long-term.

What regulatory changes would be a priority to make the transition easier?

The main regulatory change is to establish well-designed capacity markets to guarantee the recovery of profitable investments in renewables and back-up capacity. In this report, we describe possible alternatives, being the reliability options the ones with the best qualities. In any case, a basic element is that markets should allow the participation of the demand to provide the system with the necessary services.

A well-designed market will result in an optimal and massive investment in renewables, provided they are more competitive than fossil energies, including the cost of CO2 equivalent, of course. If this cost is not well internalized, an additional support mechanism should be needed.

Should the electric market change from a marginal model to any other alternative model to stimulate the development of renewable projects? Do you have any proposal?

I think that what is necessary is a modification not a change, as the marginal market has a lot of advantages in comparison to other more regulated systems, for example: its compatibility with the European market. With the abovementioned suitable modifications, the market will be able to stimulate the development of profitable renewable energies.

And, finally, what regulatory mechanisms could be taken into consideration to encourage the development of energy storage projects?

In my opinion, the best regulatory mechanism would be a well-designed market. This market will transmit the suitable economic signals, both in energy retribution, steady capacity or flexibility. So, the investment in storage will answer the needs of the system and will be paid for that. Furthermore, it will allow different storage technologies, including demand-response, to compete or complement each other, if necessary.

However, if we want to encourage non-competitive emerging technologies to try and reduce their costs by creating markets, then, a tender of this kind of technologies would be advisable, once again, including also the demand possibilities.

References

• Economics for Energy | Some thoughts on capacity markets
• Economics for Energy | Energy roles: capacity markets
• IIT Comillas | Report: the future Spanish electric system: challenges and policies

Want to read more? Click for the following challenge: demand management.

Are you interested in this challenge? Read the interview to another expert on the adaptation of the energy market.