Market Design

CWPE 0615 and EPRG 0515 These working papers present preliminary research findings, and you are advised to cite with caution unless you first contact the author regarding possible amendments. Introduction The goals of market design include, as a precondition of continued popular and therefore political support, confidence in security of high quality supply at sustainably competitive prices. Sustainability here refers both to the ability of the sector to finance and deliver efficient and reliable electricity supply and in the environmental sense of reducing greenhouse gas emissions. Efficiency requires that energy, capacity and ancillary services are at least cost but at prices that allow adequate investment to be financed by the private sector. This in turn requires that the markets provide price signals for entry of new generating capacity that is efficient in location, timing, scale and fuel choice, and for dispatch that minimises social costs, including environmental costs. Market integration in turn means that European costs are minimised, trade takes place guided by comparative advantage, importing competition into more concentrated markets. Before 1990, almost every electricity supply industry was vertically integrated with a captive franchise market, either state-owned (the majority case) or under regulated private ownership (particularly in the US, but also in Germany). In both cases the form of regulation was effectively cost-of-service regulation. 2 Electricity liberalisation starts from the premise