Power market and flexibility design

Electricity market design is crucial for the integration of renewable energy sources and technologies. The rules governing how electricity is dispatched, traded and remunerated shape investment signals, operational efficiency and system reliability. Well-functioning markets enable substantial shares of renewables, including variable renewables, while maintaining supply security and controlling costs.

Dispatch arrangements influence which power plants operate at any given time and therefore affect how renewables are integrated. Market-based dispatch frameworks help ensure that resources are used efficiently, with curtailment applied only when necessary for system security.

In systems with growing shares of wind and solar power, accurate forecasting becomes increasingly important. Improved forecasts reduce imbalances and associated costs, while aggregators enable smaller generators with distributed resources to participate in wholesale and balancing markets by pooling output.

Intraday markets allow participants to adjust their positions closer to real time as forecasts are updated. Liquid intraday trading with short gate-closure times helps reduce system imbalances and lowers balancing costs, supporting efficient renewable energy integration.

Capacity mechanisms can complement energy markets by ensuring long-term adequacy in systems with high renewable shares. A policy mechanism ensuring payment for availability – when open to renewables, storage, and demand response on equal terms and calibrated to reflect respective contributions to system reliability – supports investments in flexible resources for decarbonisation.

Flexibility in renewable-based power systems can be provided through several channels. Demand-side response and storage technologies – including batteries, pumped hydro and thermal storage – play a direct role. Additional flexibility arises from grid expansion and interconnections, as well as from closer integration between electricity and other sectors, such as electric vehicles, hydrogen production and synthetic fuels.

Together, these elements form the foundation of a resilient and efficient renewable power system.

Dispatch regulation

Dispatch regulation is a core element of electricity market design, as it determines how generating units are scheduled to meet demand at any given time. Depending on the structure of the power system, this function may be carried out by a vertically integrated utility, a single buyer, an independent system operator, or the grid operator.

The rules governing dispatch directly influence how renewable energy is integrated into the system, affecting curtailment levels, market participation and overall efficiency. Clear and transparent dispatch frameworks are essential to ensure that renewable-based generation is accommodated while maintaining system reliability and cost-effectiveness.

Dispatch regulation involves several considerations:

Priority dispatch: In systems where competition is limited or market rules do not yet ensure equal treatment of generators, priority dispatch for renewable energy can safeguard access to the grid. Ensuring that renewable electricity is taken before conventional generation can reduce curtailment risks and support early-stage deployment until more robust market conditions are in place.
Economic dispatch: Dispatch based on short-run marginal costs promotes efficient system operation by ensuring that the lowest-cost generation is used first. Applying this principle consistently across all technologies – including renewables, fossil fuels and nuclear power – supports fair competition, reduces overall system costs, and facilitates the growing integration of renewables as markets mature.
Flexibility in legacy fossil-fuel contracts: Long-term take-or-pay contracts for fossil-fuel power plants can limit operational flexibility and crowd out renewable-based generation. Phasing out such rigid arrangements, or introducing flexibility provisions in remaining contracts, reduces lock-in effects and puts dispatch decisions more in tune with evolving system needs and the priority of decarbonisation.

Case study: Dispatch regulation in Germany

Germany introduced priority dispatch for renewables under the Renewable Energy Sources Act (Erneuerbare-Energien-Gesetz, EEG), first enacted in April 2000. Priority dispatch required system operators to give precedence to electricity generated from renewable sources over conventional generation, supporting early-stage market entry and rapid capacity expansion.

Priority dispatch reduced curtailment risk and improved revenue certainty for renewable power producers at a time when technologies were less competitive and market structures favoured incumbent generators. This provision played a significant role in enabling large-scale investment in wind and solar generation during the early phases of the Energiewende (energy transition).

Subsequent reforms of the EEG, particularly a 2014 revision, placed greater emphasis on market integration. Renewable power producers were increasingly required to market their electricity directly on the wholesale market and operate under economic dispatch principles, aligning generation decisions more closely with short-run marginal costs and system needs.

In parallel, Germany’s electricity market liberalisation in the late 1990s led to the termination of long-term take-or-pay contracts for fossil fuel-based power plants. Conventional generators were required to participate in the wholesale market, eliminating inflexible contractual arrangements that could hinder efficient dispatch.

The combination of market-based dispatch for all generation technologies and the gradual integration of renewables into wholesale markets improved system efficiency and transparency. It has also ensured that curtailments in renewable energy supply are rare and only happen for system-security reasons.

Legislation and policy documents

Federal Republic of Germany. Act on the Development of Renewable Energy Sources (Renewable Energy Sources Act – RES Act 2014) [Gesetz zur grundlegenden Reform des Erneuerbare-Energien-Gesetzes und zur Änderung weiterer Bestimmungen des Energiewirtschaftsrechts (Erneuerbare-Energien-Gesetz – EEG 2014)], in force as of 1 August 2014. Unofficial translation. 2014.

Secondary literature

Agora Energiewende. The Liberalisation of Electricity Markets in Germany: History, Development and Current Status. Agora Energiewende. 2019.

Purkus, Alexandra, Erik Gawel, Marc Deissenroth-Uhrig, and Sandra Wassermann. “Market integration of renewable energies through direct marketing – lessons learned from the German market premium scheme.” Energy, Sustainability and Society (5:12). 2015.

Solar and wind forecasting and aggregation

Accurate forecasts of power output are critical as higher VRE shares increase system uncertainty, directly affecting dispatch efficiency, balancing costs, and the ability of markets and system operators to maintain reliability. Increasing distribution of power-generation assets around the grid means aggregators are needed to consolidate generation and demand data for reliable forecasts of power supply.

Key considerations in VRE supply forecasts are:

Forecasting responsibility and accountability: Clear responsibility for forecasting and managing imbalances improves forecast accuracy and system reliability. Transparent performance metrics and settlement rules then strengthen accountability and encourage continuous improvement.
Forecasting granularity: The level at which forecasts are assessed – plant-specific or aggregated – shapes the trade-off between accuracy and cost. Aggregation smooths variability and can reduce system costs, while plant-level forecasting better captures local constraints and real operating conditions.
Imbalance mechanisms and penalties: Well-calibrated imbalance frameworks promote accurate forecasting by linking deviations to proportionate charges. Tolerance bands and symmetric treatment of over- and under-forecasting support learning and participation while limiting excessive risk exposure.

Case study: Balancing responsibility for renewables in Spain

Spain began progressively assigning balancing responsibility to renewable power producers in 2007, starting with Royal Decree 661/2007. This marked a shift from treating renewables as fully shielded from market responsibilities toward greater integration into power system operations. Full and explicit imbalance settlement obligations were consolidated through subsequent market and regulatory reforms, notably Royal Decree 413/2014. These reforms aligned renewable generators with the same balancing framework applied to conventional power plants.

Under this framework, renewable power producers are required to submit day-ahead and intraday generation schedules to the wholesale electricity market. Deviations between scheduled and actual generation are financially settled through the imbalance mechanism. Imbalances are priced symmetrically, meaning both over-generation and under-generation are settled at imbalance prices reflecting real-time system conditions. This approach avoids structural bias and ensures that producers face incentives aligned with system-balancing needs.

Exposure to imbalance costs prompted renewable power producers and aggregators to invest in improved forecasting tools and operational capabilities. Enhanced wind and solar forecasting, combined with more active intraday trading, has reduced forecast errors and imbalance volumes over time. Thus, the introduction of balancing responsibility has contributed to improved system efficiency by reducing balancing costs and integrating VRE more smoothly into market operations.

Legislation and policy documents

Government of Spain. Real Decreto 413/2014, de 6 de junio, por el que se regula la actividad de producción de energía eléctrica a partir de fuentes de energía renovables, cogeneración y residuos [Royal Decree 413/2014 of 6 June 2014 regulating the generation of electricity from renewable energy sources, cogeneration and waste]. Boletín Oficial del Estado (no. 140). 2014.

Secondary literature

Red Eléctrica. Integration of renewables.
Red Eléctrica. Report 2025: Renewables in the Spanish electricity system. 2026.
ENTSO-E. Balancing report 2024. European Network of Transmission System Operators for Electricity. 2024.

Intraday market design to integrate renewables

To successfully integrate high shares of wind and solar PV, electricity markets must be designed to accommodate their variability and uncertainty. Intraday markets help manage the variability of wind and solar generation by allowing participants to adjust their positions closer to real-time, typically at hourly intervals or even in 15-minute blocks. The resulting flexibility enables renewable power producers to better match their forecasts with actual generation, thereby reducing imbalance costs.

Key considerations for intraday markets include:

Gate-closure timing: Shorter gate-closure times enable adjustments closer to real time as forecasts improve, reducing imbalances and supporting efficient integration of variable renewables.
Market liquidity and access: Transparent, liquid markets with non-discriminatory access encourage active participation by renewable power producers, aggregators and storage providers, improving price signals and lowering balancing costs.

Case study: Hour-ahead intraday markets in Japan

As part of its post-Fukushima electricity market reforms, Japan introduced shorter intraday trading arrangements to strengthen system balancing. The Japan Electric Power Exchange (JEPX) launched its intraday market in 2009, four years after the introduction of the day-ahead (spot) market in 2005. This initial intraday market allowed market participants to adjust positions after the day-ahead auction, improving flexibility in system operation.

In 2016, the JEPX further enhanced market flexibility by introducing an hour-ahead intraday market. This enabled trading closer to real time, providing market participants with opportunities to respond to updated demand and generation forecasts. Shorter gate-closure times reduced the exposure of wind and solar generators to forecast errors.

By allowing intraday rescheduling, the market has facilitated more accurate alignment between scheduled and actual generation, lowering imbalance volumes and system balancing costs.

Legislation and policy documents

Japan. Electricity Business Act (Act No. 170 of 1964), as amended (last version: Act No. 41 of 2017). Japanese Law Translation.

Secondary literature

REI. Recommendations for Power System Restructuring: Toward Further Deployment of Renewables. Renewable Energy Institute (Japan). 2020.

Ma, Teng, Yimeng Du, and Tao Xu. Renewable Energy Generation Effects on the Electricity Market: An Empirical Study on Japan's Electricity Spot Market. Discussion Paper No. 17. Research Project on Renewable Energy Economics, Graduate School of Economics, Kyoto University. 2020..

Balancing and ancillary services markets

Beyond renewable-based generation and flexibility, power systems require additional services to ensure secure and reliable operation. Ancillary and balancing services enable system operators to maintain real-time balance between supply and demand and to preserve power quality, including frequency and voltage, even in the face of unexpected disruptions.

As electricity systems shift towards higher shares of renewables, the market has become more technology-neutral, allowing renewable and distributed resources to support those services. Opening balancing and ancillary service markets to renewable energy projects and aggregators can improve system stability while creating additional revenue streams that support the economic viability of renewable-based power systems.

Key considerations for balancing and ancillary services markets include:

Market access and eligibility: Renewable power producers can be allowed to bid directly or via aggregators into balancing markets. This is achieved by relaxing minimum size thresholds, enabling portfolio aggregation, and ensuring non-discriminatory participation rules.
Adapted balancing products: For balancing products to align well with renewables, they require shorter contract durations, options for partial activation, and recognised values for fast ramping and response, rather than firm capacity alone.
Risk allocation: Deviation charges and imbalance settlement mechanisms must be symmetric, transparent, and proportionate by design.

Case study: Procuring balancing services through competitive markets in Japan

Japan established its Supply-Demand Adjustment Market (the Balancing Market) in 2021 as part of broader electricity market reforms. The aim of this national balancing market is to ensure real-time system stability while enabling VRE shares and greater flexibility. The balancing market is operated by the Electric Power Reserve eXchange, EPRX. Transmission and distribution system operators procure balancing services via this platform, ensuring coordinated system operation across regions.

The market is open to a wide range of energy sources, including conventional power generation, VRE portfolios, battery storage, and demand response. Aggregators play a key role by pooling smaller assets to meet minimum participation thresholds.

Distinct reserve products are defined by differentiated performance requirements:

Primary Reserve (Frequency Containment): minimum capacity of 1 megawatt (MW), response within 10 seconds, and a minimum duration of 5 minutes.
Secondary Reserve (Frequency Restoration): minimum capacity of 1 MW, response within 5 minutes, and a minimum duration of 30 minutes.
Tertiary Reserve (Replacement): minimum capacity of 1 MW, response within 15-45 minutes, and a minimum duration of at least 3 hours.

Clear technical specifications and standardised procurement allow system operators to secure appropriate levels of flexibility while encouraging participation by non-traditional providers. The framework supports efficient balancing as renewable penetration increases.

Legislation and policy documents

Japan. 強靱かつ持続可能な電気供給体制の確立を図るための電気事業法等の一部を改正する法律 [Act for Partial Revision of the Electricity Business Act, etc., to Establish a Resilient and Sustainable Electricity Supply System] (Law No. 49 of June 12, 2020). National Diet Library / House of Representatives Legislative Database. 2020.

Secondary literature

Japan Electric Power Information Center, Inc. (2026, February 28). The electric power industry in Japan 2025.

Capacity-market design to integrate renewables

Well-designed capacity markets can support the energy transition by ensuring system adequacy as VRE shares rise. Designing capacity markets to be technology-neutral and accessible to renewables, storage, and demand response is essential so that any resource package capable of delivering reliability and flexibility can compete fairly and cost-effectively.

Key considerations for capacity markets include:

Technology-neutral eligibility: Open participation for renewables, storage, demand response and hybrid resources supports fair competition and broadens the pool of capacity providers for the power system. Transparent de-rating methods that reflect actual reliability contributions improve adequacy outcomes and strengthen confidence in the capacity mechanism.
Contract duration and stability: Longer, more predictable capacity contracts, particularly for new investments, reduce revenue uncertainty and improve financing conditions. Contract duration is especially important for storage, hybrid projects and other flexibility resources that complement renewable power generation.
Flexibility-oriented design: Capacity mechanisms that focus on performance during scarcity or system stress periods better reflect the value of flexibility. Linking remuneration to availability when it matters most rewards investments that enhance reliability in renewable-based power systems.

Case study: The UK Capacity Market

The United Kingdom established its capacity market under the Energy Act 2013 and implemented through the Electricity Capacity Regulations 2014. The primary objective of the UK Capacity Market is to ensure the long-term security of electricity supply by remunerating capacity providers that commit to availability during periods of system stress, particularly in a power system with growing shares of variable renewables.

Capacity is procured through competitive auctions open to a broad range of resources. Eligible technologies include conventional generation, demand-side response, battery storage, and interconnectors. This technology-neutral approach supports system flexibility and complements energy-only market signals.

Participating capacity providers are subject to de-rating factors that reflect their expected contribution to system adequacy during stress events. For example, storage and demand response are assessed based on their availability and duration, ensuring that capacity payments are aligned with actual reliability value rather than nominal installed capacity.

The Capacity Market uses both T-4 auctions, held four years ahead of delivery, and T-1 auctions, held one year ahead. This dual structure allows the system to secure long-term investment in new capacity while also adjusting for updated demand and supply conditions closer to real time. Contracts of varying lengths provide revenue certainty that can support investment in flexible and low-carbon assets, including storage and demand response, which may face revenue volatility in energy-only markets.

Legislation and policy documents

Legislation (UK). The Electricity Capacity Regulations 2014. Statutory Instrument 2014/2043.

Secondary literature

RAP. Capacity market review in Great Britain: Response to the call for evidence. Regulatory Assistance Project. 2018.

Procurement of energy storage systems

The procurement of energy storage, particularly battery systems, supports large-scale VRE integration. This trend is driven by rapidly falling costs for storage technologies, primarily battery energy storage. Policymakers need to decide whether they prefer to procure storage separately or in combination with specified renewable energy projects.

Key considerations in procuring storage include:

Procurement targets and strategy: Clear long-term signals on storage needs, eligible services and procurement timelines improve visibility and reduce uncertainty for battery storage developers. Strategic planning supports investment decisions and helps ensure storage capacity is deployed in line with system requirements.
Revenue-stacking frameworks: Transparent rules allowing battery storage to earn revenues from multiple services – such as energy arbitrage, capacity provision and ancillary services – enhance project economics. Clear boundaries prevent double counting while maximising the system value of storage.
Technology-neutral procurement: Competitive, technology-neutral tenders based on performance criteria promote cost efficiency and allow battery storage to compete fairly with other flexibility solutions. Such approaches encourage innovation and reveal the most efficient options for meeting system needs.
Co-located storage and renewables: Dedicated procurement pathways for renewable-based generation paired with battery storage support the delivery of stable low-carbon power. Co-location can improve the usage of grid connections, reduce curtailment, and strengthen the contribution of renewables to system reliability.

Case study: Battery storage procurement in Greece

Greece introduced a dedicated support scheme in 2023 to accelerate the deployment of standalone battery energy storage systems. The initiative aimed to strengthen system flexibility, support renewable energy integration, and enhance security of supply in a power system with growing VRE shares.

Storage capacity was procured through competitive tenders structured in three successive auction rounds. The design included minimum oversubscription requirements to drive competition and limits on bidder concentration to prevent market dominance.

The scheme combined two complementary support elements. First, an upfront, capacity-based investment grant (EUR/MW) reduced capital expenditure and financing barriers. Second, a time-limited (10-year) two-way CfD provided revenue stability, topping up market revenues when prices were low and clawing back excess revenues when prices exceeded the reference level.

Participation was limited to standalone battery storage assets connected to the transmission network. Projects were required to meet minimum thresholds for power output and energy duration that increased across auction rounds – for example, from two-hour to four-hour storage configurations. These requirements were complemented by binding performance and availability obligations.

The combined use of grants and two-way CfDs reduced investment risk while maintaining exposure to market signals. Performance-based eligibility criteria ensured that procured storage delivered meaningful system value in terms of duration and reliability.

Legislation and policy documents

Ministry of Environment and Energy (Greece) Joint Ministerial Decision No. ΥΠΕΝ/ΔΗΕ/55948/1087 (Government Gazette B' 3416/20.05.2023). Outlined in: SEE Legal. Regulatory Framework for Development of Stand-Alone Battery Storage Projects in Southeast Europe. SEE Legal. 2023.

Secondary literature

EASE. State Aid: Overview of Greek Scheme to Support the Development of Electricity Storage Facilities. European Association for Storage of Energy (SA.64736). 2024.

European Commission JRC. Implementation of Commission Recommendation on Energy Storage in the Member States. Greece: pp. 103-109, references Greece's SA.64736 storage support and competitive bidding. European Commission – Joint Research Centre. 2025.

Procurement and incentives for demand-side flexibility

Demand-side flexibility lets electricity systems balance rising VRE shares without relying solely on carbon-intensive, supply-side generation assets. By rewarding consumers and aggregators for shifting or reducing their demand at times of system stress, well-designed flexibility frameworks lower system costs, enhance security of supply, and accelerate the integration of renewables.

Key considerations to achieve demand-side flexibility include:

Procurement products: Flexibility services are defined in standardised products (e.g. peak reduction, fast response, locational flexibility) with transparent technical requirements, durations, and performance obligations, allowing providers to assess value and participate at scale.
Accessible participation rules: Market rules should lower entry barriers and explicitly enable aggregators, suppliers, and small consumers to participate, with clear provisions for aggregation, metering, and data access to unlock distributed flexibility.
Measurement and verification: Credible baselining, monitoring, and settlement methodologies help to accurately quantify delivered flexibility, ensure fair payment, and maintain confidence in demand-side resources as system assets.
Time-of-use pricing: Time-of-use tariffs continually send price signals that encourage consumers to shift demand away from peak periods, complementing formal flexibility procurement by triggering both behavioural and automated demand response.

Case study: Demand-side flexibility procurement in the UK

The United Kingdom established its Demand Flexibility Service (DFS) in 2022 to enhance short-term system flexibility and keep electricity supply reliable in periods of peak demand or system stress, particularly with generation from variable renewables on the rise. The DFS enables households and businesses to provide demand-side flexibility through licensed electricity suppliers and aggregators. These intermediaries bundle individual consumers into portfolios, register eligible DFS units, and engage services on behalf of end users, such as small-scale flexibility providers, including residential households with smart thermostats.

Flexibility is procured through predefined DFS activations, including both test and live-system activations. The system operator publishes clear and standardised service terms that define eligibility criteria, bidding and acceptance procedures, performance requirements, and settlement rules. Delivery of flexibility is assessed against agreed consumption baselines. Established verification methodologies are used to quantify actual demand reduction during activation events, ensuring accurate settlement and maintaining system integrity.

The DFS provides a transparent and scalable mechanism for mobilising demand-side response, complementing supply-side flexibility resources and reducing reliance on conventional peaking generation.

Legislation and policy documents

Ofgem (UK). Direction to National Grid Electricity System Operator in relation to revisions to its C16 statements required due to the introduction of the Demand Flexibility Service (4 November 2022). Office of Gas and Electricity Markets. 2022.

Secondary literature

DESNZ (UK). Clean flexibility roadmap. Department for Energy Security and Net Zero. 2025.

Nesta. Smart prepayment customers’ experience of the Demand Flexibility Service. 2024.

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7. Industrial policies, localisation and selected trade-related measures

Dispatch regulation

Case study: Dispatch regulation in Germany

Legislation and policy documents

Secondary literature

Further reading

Solar and wind forecasting and aggregation

Case study: Balancing responsibility for renewables in Spain

Legislation and policy documents

Secondary literature

Further reading

Intraday market design to integrate renewables

Case study: Hour-ahead intraday markets in Japan

Legislation and policy documents

Secondary literature

Further reading

Balancing and ancillary services markets

Case study: Procuring balancing services through competitive markets in Japan

Legislation and policy documents

Secondary literature

Further reading

Capacity-market design to integrate renewables

Case study: The UK Capacity Market

Legislation and policy documents

Secondary literature

Further reading

Procurement of energy storage systems

Case study: Battery storage procurement in Greece

Legislation and policy documents

Secondary literature

Further reading

Procurement and incentives for demand-side flexibility

Case study: Demand-side flexibility procurement in the UK

Legislation and policy documents

Secondary literature

Further reading

Keep reading