Implementing Rewiring the nation.  How do we future proof our networks - Markets and Regulation

This article is part 4 of 5 in our current series on “Implementing Rewiring the nation.  How do we future proof our networks?"
Considers the market and regulatory challenges that the energy transition poses and some of the practices and policy changes that may be necessary to support the energy transition.  

The articles together seek to provide an overview of current thinking regarding the many challenges associated with the energy transition to a zero-carbon power system.  It has been developed by reviewing a number of CIGRE Electra strategic articles that have been produced over the last twelve months together with a limited review of other associated articles.  From this, five challenging areas have been identified as needing global attention. 

They are: 

• Reliability, security and resilience
• Standardisation and optimisation of supply chains
• Evolving Technologies
• Markets and Regulation
• Environmental and social impacts

The Challenge  

The energy transition poses significant market and regulatory challenges as societies shift from traditional fossil fuel-based energy systems to cleaner and more sustainable alternatives. These challenges arise from the need to create a supportive environment that enables the adoption and integration of renewable energy sources into existing energy markets.  

One of the main market challenges is the establishment of a level playing field for different energy sources. Fossil fuel industries have benefited from established infrastructure, subsidies, and economies of scale. In contrast, renewable energy sources often require upfront investments and face intermittent availability. Creating fair and transparent market mechanisms that account for the true costs and benefits of different energy sources is crucial. This involves phasing out fossil fuel subsidies, implementing carbon pricing mechanisms, and developing market frameworks that reward the integration of renewable energy into the grid.  

Regulatory challenges also arise due to the complex nature of the energy transition. As renewable energy technologies emerge, regulations must be adapted to accommodate these new sources of energy generation. This includes streamlining permitting processes, updating grid codes to facilitate the integration of intermittent renewables, and establishing clear guidelines for energy storage and grid management. Additionally, regulatory frameworks need to encourage innovation and competition in the renewable energy sector while ensuring consumer protection and grid stability.    

The energy transition requires international cooperation to address regulatory challenges. Harmonizing standards, regulations, and certification processes across countries can facilitate the development of global renewable energy markets. This also has to support measures to facilitate a ramp up in supply from manufacturers, including consistent customer specifications and a level of cooperation between customers and manufacturers. Cooperation is particularly important for cross-border transmission infrastructure, as renewable energy resources may be located far from major population centres. Establishing interconnections and regional cooperation mechanisms can help optimize the use of renewable energy resources and improve grid stability.  

The energy transition requires regulatory support for new business models and market structures. Distributed energy resources (DER), such as rooftop solar panels and community-owned wind farms, challenge the traditional centralized model of energy production and distribution.  Regulatory frameworks need to enable these innovative models, promote energy democratization, and facilitate the integration of smaller-scale renewable energy projects into the grid.  

Market and regulatory challenges play a crucial role in the energy transition. Creating a fair and competitive market environment, adapting regulations to accommodate renewable energy technologies, fostering international cooperation, and supporting innovative business models are essential.  

Addressing these challenges effectively can accelerate the adoption of renewable energy sources and facilitate the transition towards a more sustainable and decentralized energy system.  

Examples of actions underway:  

• Germany's Renewable Energy Act (EEG): Germany's EEG, implemented in 2000, introduced a feed-in tariff (FIT) system to incentivize renewable energy generation. Renewable energy producers are guaranteed fixed payments for the electricity they feed into the grid. The EEG has been instrumental in driving the rapid growth of renewable energy installations in Germany[1].  

• California's Renewable Portfolio Standard (RPS): California's RPS, established in 2002 and expanded over the years, mandates that a certain percentage of the state's electricity must come from renewable sources. The RPS has created a market for renewable energy credits (RECs), which utilities can purchase to meet their renewable energy targets[2].  

• Denmark's Electricity Market Reform: Denmark implemented an electricity market reform that allowed wind power producers to participate in the wholesale electricity market. They also introduced a system of guaranteed minimum prices for wind energy, known as feed-in premiums. [3](PDF)
  
  
• Australia's Renewable Energy Target (RET): Australia implemented a Renewable Energy Target in 2001, aiming to achieve 20% of electricity generation from renewable sources by 2020. The RET has been instrumental in driving investment in large-scale renewable energy projects, such as wind and solar farms. It has also led to the creation of a market for Renewable Energy Certificates (RECs), which are tradable instruments used to meet the renewable energy targets [4] 

• Virtual Power Plants (VPPs): Virtual Power Plants are emerging as a market model that aggregates distributed energy resources. VPP’s enable the effective integration of decentralized renewables and contribute to grid stability and resilience.  The AEMC lists several options and schemes already available to Australian residents[5]. 

 Other possible Actions 

• Investor Confidence and Risk Mitigation: Policies that promote investor confidence and mitigate risks associated with renewable energy investments are crucial.
• Renewable Energy Targets and Mandates: Governments can set ambitious targets and mandates for renewable energy adoption. These targets provide a clear signal to the market, encouraging investment and innovation in renewable energy technologies.  
• Feed-in Tariffs and Power Purchase Agreements (PPAs): Implementing feed-in tariffs or PPAs can provide long-term contracts and guaranteed pricing for renewable energy producers.  
• Grid Modernization and Flexibility: Updating and modernizing the electricity grid is crucial to accommodate the integration of renewable energy sources. Advanced grid management systems, energy storage technologies, and demand response programs enable the effective integration of intermittent renewable energy and ensure grid stability.  

[1] https://cms-lawnow.com/en/ealerts/2022/08/the-german-renewable-energy-sources-act-2023-eeg-2023-has-been-passed-a-new-framework-for-renewable-energy 
https://en.wikipedia.org/wiki/German_Renewable_Energy_Sources_Act 

 [2] https://www.cpuc.ca.gov/rps/ 

 [3] "Wind Energy Policy in Denmark: Status 2002   Soren Krohn, Managing Director, Danish Wind Industry Association, 22 February 2002

 [4] (https://www.cleanenergyregulator.gov.au/RET/About-the-Renewable-Energy-arget#:~:text=The%20Renewable%20Energy%20Target%20is,from%20sustainable%20and%20renewable%20sources.) 

[5] (https://www.aemc.gov.au/news-centre/data-portal/retail-energy-competition-review-2020/vpp-offers-available)