Global electricity transformation: The critical need for integrated market design and risk management research

The past three decades transformed the electricity industry. The essential goals of liberalization have been to lower costs, improve reliability, and stimulate investment and innovations through establishment of competitive electricity markets, while also relying on market mechanisms to provide creative solutions to environmental and security problems. In many instances, these goals have been achieved, but the occurrence of some spectacular market failures have brought into question the whole restructuring effort. This paper reviews recent experiences with market reform and concludes that a significant cause of failure has been the rush to unbundle vertically integrated utilities without sufficient consideration of alternative ways to manage the risk of electricity market restructuring. In particular, there is a critical need for integrated market design and risk management research to improve the process of market transformation by taking a more evolutionary approach to discover a ‘Third Way’ above vertical integration and full unbundling. Such research can offer a crucial feedback link to the restructuring process by identifying important lessons to be learned from past experience and developing new analytical tools to help introduce more successful market designs for the future.