Time for a Second Electricity Market Reform?

The ongoing transformation of the electricity supply system implies a rapidly increasing proportion of intermittent power, in the form of wind and solar power. These technologies have two unique features. One is that variable costs are close to zero. Thus, whenever a wind or solar power plant can produce, it produces at a lower cost than any conventional power plant, except some CHP.  The other is that the level of output depends on nature and is more unpredictable than the output of conventional power plants.

These characteristics of wind and solar power have created concerns about the financial viability of conventional power plants and thus about the security of supply of the future electricity supply system in Sweden. Does this mean that a revision of the current electricity market design is needed? The conclusion put forward in this report is that several minor changes of the rules and regulations of the electricity market indeed are needed, while there is no immediate need for major changes.

However, it cannot be ruled out that some major changes of the electricity market design will have to be considered in the future. This would probably amount to replacing the current strategic reserve, “effektreserven”, with an extended capacity mechanism, preferably a Nordic rather than a Swedish capacity mechanism.