3 global power market regulatory trends that matter

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We’re in a time of extreme volatility for power markets. Current events (inflation, Russia’s invasion of Ukraine) are top of mind for all of us in the energy sector. But they’re not the only trends driving energy prices up and increasing volatility.

The stage was already set for volatility prior to 2022. The approaching fossil fuels peak and the increasing share of non-dispatchable renewable energy sources are making prices less stable and more difficult to predict.

Around the world, energy market regulators are responding to this volatility. They’re changing their approaches in an attempt to offer short-term relief to the public and long-term solutions to the challenges facing the energy sector.

At N-SIDE, we’re closely monitoring these trends in power market regulations. Here’s our take on the three most important trends to watch:

Volatility leads to increased regulation

For better or worse, energy regulators are more likely to act in times of volatility. High energy prices and large price swings create increased pressure on regulators. Around the world, regulators are responding to the current environment in different ways.

Regulators in many markets have already implemented, or are in the process of implementing, price caps. Others are openly discussing the idea. In India, the Central Electricity Regulatory Commission (CERC) told power exchanges to cap prices in all segments. It joins a group of regulators warming to this strategy. Regulators in both the UK and Australia established price caps in 2019.

Just recently, Australia experienced an unintended consequence of this strategy as costs to generators exceeded the price cap, leading to outages. The Australian market operator took the extraordinary step of suspending the spot market in order to prevent widespread blackouts.

Meanwhile, in Europe, Spain and Portugal both set price caps on natural gas, acting independently of the European common market. Critics worry that this may lead to problems, especially if more countries follow suit, due to the deep integration of Europe’s energy markets.

When prices are high or unstable, regulators are also more likely to “crack down” on perceived problems in energy markets. Currently, the European Commission is considering controversial changes to its market rules (CACM 2.0) which have been opposed by power exchanges and TSOs.

Energy price volatility will likely continue, at least in the short-term. Therefore, power exchanges and TSOs must be prepared for rapid and high-magnitude regulatory changes, and be able to respond quickly. 

One way to prepare is by increasing transparency, which can help prevent unnecessary overreach.

Resilience requires efficiency, technology

Price volatility isn’t the only concern for regulators. With extreme weather becoming more common due to climate change, grid resilience is a priority. 

In addition to system operators, power exchanges are a crucial component of grid resilience. By offering more efficient trades of energy and capacity across regions, exchanges help ease congestion and get power where it's needed. Many regulators are relying on increased regionalization as part of their resilience strategies, in which power exchanges and system operators will play a key role. 

The EU’s goal of a European Single Market is the pinnacle of this approach, but it's happening on a smaller scale elsewhere as well. In the U.S., the Federal Energy Regulatory Commission (FERC) has shown increased acceptance of regionalization of power markets with recent decisions. 

To support grid resilience, power exchanges and system operators should focus on implementing intelligent technology that can enable more efficient trades of all kinds across regions. 

N-SIDE has deep experience developing and implementing this technology. In fact, our software helps facilitate single-day ahead coupling in Europe. 

The clean energy transition continues

While all eyes are on soaring energy prices and volatility now, regulators have not abandoned their long-term goals of supporting the clean energy transition. 

Globally, many energy regulatory bodies have publicly stated specific goals and intentions for the transition to renewables. As just one example, At COP26, a group of regulators and industry groups came together to launch the Regulatory Energy Transition Accelerator (RETA), a new global initiative to support clean energy regulations. 

Electricity regulation in the U.S. tends to follow a different playbook. Notably, however, FERC made changes in 2020 that allowed renewables more access to the grid. 

Power exchanges must be ready to support the clean energy transition by offering solutions for renewables and storage. If they’re not prepared, it’s becoming increasingly clear that regulators will step in to mandate these changes. 

Exchanges should get ahead of changes by implementing and enhancing support for renewable technologies as a top priority. 

Conclusion

While they sometimes disagree on how to accomplish them, power exchanges, system operators, and regulators share the same fundamental goals. Stable and affordable energy prices, the resilience of the electric grid, and clean energy are in everyone’s best interest. 

At N-SIDE, we’re keeping a close eye on global power market regulatory trends. In response to price volatility and other challenges, we’re continuing to refine our technology, launch new solutions, and partner with power exchanges, system operators, and others to solve tough problems.

Related: N-SIDE makes pan-European, single-day-ahead coupling possible with EUPHEMIA..
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About the Author

Consultant Market Design Services | Mehdi holds an MSc in Mathematics, an MSc in Financial Risk Management from ULiège, and a Ph.D. in Economics and Management Sciences from UCLouvain, with a thesis on the clearing of the European day-ahead electricity markets. Mehdi was also a post-doctoral researcher in Mathematical Optimization at Johns Hopkins University, Baltimore (USA). He is now the expert contributor to the Euphemia Lab, our R&D program for Euphemia; the Single Day-ahead Coupling market clearing algorithm.

Mehdi Madani

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