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Journal Article

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


Keppler,  Jan Horst
External Organizations;


Quemin,  Simon
Potsdam Institute for Climate Impact Research;

Saguan,  Marcelo
External Organizations;

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Keppler, J. H., Quemin, S., Saguan, M. (2022): Why the sustainable provision of low-carbon electricity needs hybrid markets. - Energy Policy, 171, 113273.

Cite as: https://publications.pik-potsdam.de/pubman/item/item_27842
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.