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To achieve net-zero emissions by 2050, electricity systems around the world need to use far more variable renewable energy (VRE) generation, particularly solar and wind power. The transition from fossil fuels to VRE is unlikely to be smooth. As previous articles in this series have shown, VRE creates physical challenges due to its intermittency and variability, with different forms of energy storage emerging as critical solutions. But VRE also creates market challenges for traditional wholesale energy-only markets, with storage unlikely to provide the solution.

Natural gas has a key role to play in setting prices in today’s wholesale energy-only electricity markets. Because of the way prices are set in these markets, gas prices disproportionately determine the price of electricity. As the entry of substantial VRE generation and storage causes coal-fired generators—and subsequently gas-fired generators—to close, it has the potential to undermine this mechanism. Left unchecked, this could lead to high and unstable electricity prices, impairing vital investment signals.

Given the importance of renewables in meeting future global energy needs, are the days of wholesale energy-only electricity markets numbered? Not necessarily. Depending on the dominant technology that emerges to manage the variability of renewable energy and to ensure that adequate supply exists—whether it be zero-emissions gas, energy storage, or flexible demand—market designers and companies can adapt to the new environment, by adjusting the market design or changing their behavior. However, the wholesale energy-only market may play a very different role from the one it does today.

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