A sustainable electricity market design: Application to the Iberian market

Current electricity markets are not moving fast enough towards decarbonization, nor are they ensuring the economic sustainability of the different supply technologies in the short-term –cannibalization and depredation problems–. To solve these problems, this study presents an innovative market design to achieve a sustainable electricity system based on cleaner production. Based on the assumption that the energy supplied by manageable and non-manageable generators can be considered as two different goods, we propose a two-market system within the day-ahead market where non-manageable generators operate in the first market through long-term contracts and manageable generators operate in the (marginalist) second market. Under this system, the regulator appropriates an economic surplus that is given by the difference –produced in the first market– between what is received from the buyers in this market (second market's equilibrium price) and what is paid to each non-manageable generator (levelized cost of energy). This public surplus will be used to cover part of the regulated costs of the electricity system, lowering the final price of electricity. To simulate empirically our two-market design, we use hourly microdata from the supply and demand curves of the Iberian day-ahead market. The results of this case study are promising, showing a decrease in the electricity prices and CO 2 emissions, an increase in the amount of energy exchanged and the obtainment of a surplus for the regulator of 5,753 M€ in 2021 and 9,944 M€ in 2022. The proposed design ensures the economic sustainability of intermittent renewables as well as provides signals for long-term investment in the deployment of flexible carbon-free resources. • A new market design is proposed that allows reducing electricity prices and CO 2 emissions. • All near-zero marginal cost units ensure their economic sustainability. • Flexible resources are not affected by price regulation. • The electricity regulator obtains an economic surplus. • It does not create inefficiency to prioritize the dispatch of renewables.