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Why the sustainable provision of low-carbon electricity needs hybrid markets

Keppler, Jan Horst, Quemin, Simon and Saguan, Marcelo (2022) Why the sustainable provision of low-carbon electricity needs hybrid markets. Energy Policy, 171. ISSN 0301-4215

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Identification Number: 10.1016/j.enpol.2022.113273

Abstract

Deep decarbonization of energy systems poses considerable challenges to electricity markets and there is a growing consensus that an energy-only design based on short-term marginal cost pricing cannot deliver adequate levels of investment and long-term coordination across actors and sectors. Based on the instructive example of the evolution of European electricity market designs, we discuss several shortcomings of energy-only markets and illustrate how ad-hoc policies that intend to address them have limitations of their own, notably a lack of systemwide coordination. Second, we describe how the sheer scale and nature of deep decarbonization targets requiring massive investment in capital-intensive low-carbon technologies exacerbate these issues. Ambitious emission reduction targets thus require an evolution of market design towards hybrid regimes. Hybrid markets separate long-term investment decisions from short-term operations through a balanced and differentiated use of competitive and regulatory design elements to coordinate and de-risk investment. Finally, a historical analysis of the evolution of different electricity market designs shows how hybrid markets constitute contemporary forms of long-run marginal cost pricing that are appropriate for meeting deep decarbonization targets with reduced uncertainty and hence lower private and social costs.

Item Type: Article
Additional Information: © 2022 The Author(s).
Divisions: Grantham Research Institute
Subjects: G Geography. Anthropology. Recreation > GE Environmental Sciences
Date Deposited: 19 Oct 2022 14:45
Last Modified: 19 Feb 2024 18:30
URI: http://eprints.lse.ac.uk/id/eprint/117131

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