# <mark>INTRODUCTION</mark>

Wholesale electricity markets over the past three decades have become more sophisticated with near real-time (e.g., 5 minute) bid-based security constrained nodal pricing together with co-optimized ancillary services (or balancing) markets in several systems. However, electricity market designs differ significantly across jurisdictions – most notably across the Atlantic in the United States and Europe. It is fair to say both forms of market, and their many variants within these regions as well as in other parts of the world, have stood the test of time in terms of their robustness. Electricity markets around the world in recent years have gone through massive volatility in fuel prices, financial crises, increasing frequency of extreme weather events, as well as a technological shift towards variable renewable energy (VRE) generation, and yet they have proved to be mainly successful and resilient, driven in large part through policy initiatives including subsidies.

A major test that remains ahead of markets is their ability to support decarbonization policies to retire inefficient coal (and gas) and bring in clean energy sources and storage. It has been argued that the market designs may need to be adjusted to cope with high shares of renewables, and to play an active role in providing adequate investment signals for technologies desired from the decarbonization perspective. This is a particularly daunting task in the developing world that accounts for more than 80% of coal consumption and also hosts more than 80% of the existing stock of coal plants. These systems are not only heavily reliant on fossil fuels capacity but suffer from a lack of supply security, driven by inadequate, unreliable, and inflexible generation capacity, an underdeveloped or nonexistent grid infrastructure, a lack of reliable monitoring and control equipment, and a lack of skilled human resources and maintenance (ESMAP, 2020). Yet only one in five of these countries has a functioning wholesale electricity market (Foster & Rana, 2019). Even if there is a wholesale market in place (e.g., in India, South Africa, Vietnam, <mark>Türkiye</mark> , or Mexico), the inability to deal with legacy coal supply, disturbing generation contracts and shortcomings in the market design have often led to poor liquidity with muted or inefficient price signals.

Consequently, electricity market designs need to be critically assessed to unlock their potential so that they aid to bring in cost-effective, cleaner forms of generation _and_ retire inefficient fossil fuel units in line with the emission reduction policies. In the short term, these market reforms serve as the first step towards deeper decarbonization and reliable operation of a renewable-heavy system in the long run. This is a critical need not just for decarbonization of the sector but also to decarbonize heating, transport and industry including production of hydrogen that may be an integral part of the solution for the sector as a whole in the long term. Large-scale retirement of coal coupled with a much larger entry of solar, wind, storage, and other new forms of generation would further test the efficacy of the markets in place. Markets must provide the correct locational signals to attract new entries and produce prices that are not unmanageably volatile or prone to excessive market power. To the best of our knowledge, the behavior of market prices and levels of investment under alternative market designs and without the support of out-of-market subsidies and a Renewable Portfolio Standard or RE target (RPS/RET) or other policy mechanisms have not been studied sufficiently. In particular, the central hypothesis to check is the following: **_Can an incumbent electricity market under a deep decarbonization scenario produce a price outcome that is revenue adequate, ensures security of supply, and will not lead to excessive room for exercise of market power or volatility that cannot be managed through existing stock of risk products? Or does it need enhancements and new mechanisms to deal with these issues? Or is there a need for a substantially new design of electricity markets to support deep decarbonization?_** 2