Abtract

In December 2015, Heads of State from around the world agreed a landmark climate deal at Conference of Parties 21 (or COP 21) in Paris.  The agreement has since been ratified by at least 55 countries responsible for at least 55% of global greenhouse gas emissions, and came into force on November 4, 2016.  Article 4 of the agreement commits to net zero emissions, stating that there should be ‘a balance between anthropogenic emissions by sources and removals by sinks of greenhouse gases in the second half of this century’. 

Achieving the net zero emissions ambition in the second half of the century will require fundamental changes to how energy is produced and consumed across the economy.  The power sector sits in a strategic position within the economy, with a product (electricity) consumed by all other sectors. This, together with the fact that the technologies to decarbonize power are broadly known, puts power sector decarbonization at the core of the transition to a net zero emissions economy.

However, the transition will require structural reform of power market design and policies, to shift the energy mix towards low carbon sources of power generation (such as renewables, nuclear, and natural gas) and those that provide clean, secure, and affordable supply of electricity (natural gas).  Reform that focuses on maximizing the benefits of competition across technologies and firms and focusing the need for government intervention will advance the transition cost effectively.  Evolution to efficient net zero emissions power markets is likely to result in market structures and policies that are different from markets designed around traditional thermal generation, especially as the share of renewables in the power mix increases. 

The purpose of this paper is to set out the key elements of efficient power markets in the future, with a particular focus on the policy challenge of effectively integrating renewables into the power system and the likely direction of power sector reform across geographies and regions over the next few years and decades.