- Electricity markets will need significant reform if they are to keep pace with rapidly changing power systems and rising demand, according to a new report from the International Energy Agency (IEA).
The study, Electricity Market Design: Building on strengths, addressing gaps, assesses how wholesale markets and supporting policies are performing across Europe, the United States, Japan and Australia. It concludes that while short-term markets continue to function effectively, long-term markets are failing to provide the investment signals and risk-management tools needed for a secure, affordable and sustainable electricity system.
The IEA finds that short-term markets have remained robust despite growing system complexity. Over the past five years, electricity has been supplied securely more than 99.9% of the time across the regions analysed. These markets have ensured reliable grid operations, transparent pricing and broad participation from a diverse array of technologies and market actors. In Europe alone, the day-ahead market now processes more than 400,000 bids every hour.
However, the report warns that long-term markets suffer from chronically low liquidity, with most forward trading occurring no more than two years ahead of delivery. This falls far short of the 10- to 30-year horizons needed to finance new, capital-intensive projects such as renewable generation, storage and electrification infrastructure. These gaps make it harder for investors to manage price risks and commit to new projects at the scale required.
To bridge these shortcomings, many regions have turned to complementary policy mechanisms such as capacity remuneration schemes and renewable support programmes. While these have helped deliver new low-emissions generation and retain essential dispatchable capacity, the IEA notes that poorly designed schemes can introduce inefficiencies and drive up system costs.
Such mechanisms have nonetheless become a permanent feature of electricity markets, supporting objectives such as resource adequacy and emissions reduction while ensuring that flexible and dispatchable resources remain available, even if they run less frequently as renewable penetration increases.
Overall, the IEA concludes that short-term markets should be preserved and refined to suit more dynamic and decentralised systems, while long-term markets require deeper reform to improve liquidity, extend contract durations and broaden access for market participants.
The report stresses the need for a holistic and transparent approach to reform, warning that predictable policymaking is essential to maintaining investor confidence and ensuring effective implementation as electricity systems continue to evolve.
Link to the full report HERE
Author: Bryan Groenendaal
