Wholesale Electricity Market Design

Wholesale electricity market design requires an explicit regulatory process to set the market rules for compensating and charging market participants for their actions. This has led to market designs tailored to the initial conditions in the industry and the political forces driving the restructuring process in that region. The experience of the past 25 years with wholesale market design has led to increasing standardization, particularly within the United States and within Europe. This paper identifies the key features of successful electricity market designs. These include: (1) the match between the short-term market used to dispatch generation units and the physical operation of electricity network, (2) effective regulatory and market mechanisms to ensure long-term generation resource adequacy, (3) appropriate mechanisms to mitigate local market power, and (4) mechanisms to allow the active involvement of final demand in the short- term market. This is followed by a discussion of how these lessons can be applied to developing countries and small markets, so that these regions can benefit from wholesale electricity competition at lower cost and with less administrative burden than larger markets. Market design enhancements that support the cost effective integration of both grid-scale and distributed renewables is briefly discussed. The paper closes with proposed directions for future research in the area of electricity market design.