Achieving net zero emissions by 2050 will require a significant reduction in electricity sector emissions, with around half of these coming from systems that currently have liberalised electricity markets. In order to support a rapid decarbonisation of power systems, the design of these markets will need to evolve to ensure that they maximise the value delivered by existing and new low-carbon technologies. When policymakers design electricity markets, they need to consider the interactions between all parts of the market including wholesale, retail and capacity markets. At the same time, it is essential to ensure synergies with low-carbon investment frameworks and other decarbonisation policies.

This report identifies key principles for designing different parts of the market based on evidence from electricity markets globally and provides actionable guidelines to help policy makers match decarbonisation pledges with actions. With short-term wholesale markets as the starting point for generating efficient price signals, the report systematically considers the different parts of electricity markets, perspectives for integrating technologies such as distributed resources and storage, and how the design process fits with other decarbonisation policies and system planning. The principles derived from this analysis provide policy makers with market design tools in the context of new technologies and low-carbon transitions.

The electricity sector has grown to be one of the most important sources of energy. In 2020, global electricity demand was 23 230 TWh, 20% of total final energy consumption and its generation produced 40% of total energy-related CO2 emissions globally, making it the single largest source of such emissions.

At present, around 50% of electricity in the world is generated in power systems relying on liberalised markets; this will increase to approximately 76% once the People’s Republic of China (“China” hereafter) completes implementing power markets. As such, much of the accelerated decarbonisation will have to be stimulated in the short and medium term in systems that rely on electricity markets to minimise operation costs and – to varying degrees – to attract investments.

Source: IEA