Long-term contract prices are often not in sync with illiquid spot prices. These contracts and the lack of an effective price signal may delay the retirement of coal/gas as well as stall the entry of renewables.

Barring the illiquid power exchanges in the developing world, by and large, both categories of markets have stood the test of time over the last two decades. That said, the questions on optimal entry have been raised in both jurisdictions from time to time. The grid failures in UK/Europe and Texas in recent years due to extreme weather events (namely, heat waves, winter storms, and cyclones) have shown the importance of sufficient firm reserve capacity to withstand these events (Littlechild & Kiesling, 2021). The extremely high spot prices in the energy-only Texas market during its winter storm also exhibited the risk of arguably excessive volatility that many customers were exposed to. Germany (Jahns et al., 2022) and UK’s (Shankleman, 2022) policy to shut down its coal plants also eventually requires backtracking to some extent to reinstate some of its coal capacity. These events highlighted the potential vulnerability of the power systems as well as policies that may prove to be too aggressive in exposing these risks and, to some extent, interfere with the market to force thermal capacity out too quickly, leading to supply disruptions and excessive price volatility.

Mature North American and European markets offer valuable insights into the performance of each regime, but the documentation of wholesale competition in developing countries is far less common. According to (Rudnick & Velasquez, 2018), a significant share of developing countries do not meet the preconditions for the introduction of wholesale power markets, including financial sustainability, technical state of the power system, institutional suitability, and adequate political and economic environment. Many countries that initiated power system reform efforts have not implemented competitive wholesale markets, and if they did, they often struggled with the low liquidity or the presence of inflexible contracts (e.g., 20-30 year long Power Purchase Agreements) that may slow down the pace of decarbonization. Consequently, countries like Mexico, <mark>Türkiye</mark> , and Vietnam transitioned to the wholesale power markets through a simpler and more centralized Single Buyer Model. Despite the economic, technical, and political struggles discussed above, guiding principles for the design of markets remain highly relevant for developing countries. As the transition stage from the old vertically integrated (or Single Buyer) regime to the new electricity market is a vulnerable period, developing countries need a workable framework for market implementation. Since supply adequacy, in countries with rapidly growing demand with inadequate/unreliable generation is a critical measure of success of the market, the design must be tested for its robustness to bring in sufficient capacity.

As we face the added steep transition challenges involving the exit of coal/gas and entry of renewables/storage, these issues remain relevant if not reinforced, as discussed in the following subsection.

# <mark>MARKET-DRIVEN DECARBONIZATION ISSUES</mark>

Markets can and did in some cases, most notably in England and Wales over the last 25 years, deliver significant emissions relief if the cheaper form of generation also happens to be cleaner (e.g., gas over coal in the UK and renewables over gas/coal more recently in other systems). On the other hand, despite the cost rapidly falling, solar, wind, and now storage have not yet radically changed the generation mix, with solar and wind accounting for around 10% of the generation mix globally in 2021.<sup>8</sup> Even when renewables are clearly cheaper, their share in generation through wholesale markets has remained

> 8 Enerdata yearbook: https://yearbook.enerdata.net/renewables/wind-solar-share-electricity-production.html

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