The political economy of electricity market decarbonisation: a comparison of recent reforms in Britain, Italy and California

Giulia Ragosa, Jim Watson and Michael Grubb

University College London (UCL), UK

Decarbonising electricity systems is a fundamental step towards meeting climate change targets and supporting the wider decarbonisation of the economy. Given the current energy crisis, low-carbon electricity is also emerging as a key pathway for boosting energy security and shielding consumers from an increasingly uncertain geopolitical landscape.

Thanks to targeted policy support, some jurisdictions managed to reach significant levels of renewable energy penetration. While this is a great success story, their experiences reveal that integrating these resources into the power system comes with a set of challenges that call into question legacy electricity sector arrangements, originally designed around fossil fuel resources. Renewables have variable energy outputs and novel cost structures with implications for both short-term market operation and long-term system development. Given this changing landscape, market designers need to ensure appropriate cost-effective and reliable dispatch in the short-term, and that adequate levels of investment are leveraged in key low-carbon and flexibility assets to support long-term system security and wider decarbonisation. These decisions have important cost and distributional implications for electricity consumers, a key issue in the context of the ongoing economic crisis.

Against this background, forty years after reforms were first initiated to liberalise the electricity industry, many countries have embarked on a new wave of reforms to make their power markets fit-for-a-low-carbon-system. This involves changing the rules governing short-term markets including day-ahead, intraday and balancing, as well as long-term investment mechanisms like renewable subsidies and the procurement of new electricity capacity for resource adequacy and system reliability. Beyond techno-economic arrangements, transitioning to a greener power mix also calls into question legacy institutional structures and governance models, the roles of incumbent market players and consumers, as well as traditional ideas about the role of the state and markets in the power sector. Yet, most literature in this area is technical or economics oriented overlooking these institutional and political aspects.

This presentation will summarise emerging findings from research on the political economy of electricity market reform. This fills an important gap in the literature by using a comparative political economy perspective to systematically unpack recent changes in power market design that have been implemented to enable the low-carbon energy transition and wider integration of renewables. Specifically, it identifies key differences in the approaches taken by Britain, Italy and California to reforming their market rules over the last decade, and explains them from an interdisciplinary perspective drawing on political economy, techno-economic, and regulatory economics literatures. The aim is to understand how the scope and nature of these developments varies according to different technical, economic, institutional and political contexts.

The three jurisdictions were chosen as they have comparable renewable shares and face similar renewable integration challenges but exhibit important differences in terms of legacy market structures, institutional and political settings, which makes them particularly interesting to compare. Conclusions rely on the analysis of over 300 policy documents and 53 in-depth interviews with key power system stakeholders comprising of academics, experts, policymakers, market operators, representatives of different energy companies and consumer groups.

Beyond collecting empirical evidence within an understudied area of research, this study directly contributes to policy practice by providing a systematic account of the policy strategies and institutional reforms adopted by three global leaders in renewable adoption and integration, thus highlighting precious lessons for other countries undergoing the energy transition.