A well-functioning, flexible, and financially sound power sector is a necessary foundation for the energy transition, which requires the sector to adopt new service delivery models and disruptive technologies, integrate new and cleaner sources of energy, and adapt market regulations and incentives to ensure sustainable change. There is an urgent need for better-integrated and more effective policies, regulations, and support programs to incentivize market-based flexibility and help deliver cost-effective electricity security and decarbonization. Well-functioning electricity markets – able to provide efficient price signals to guide dispatch and inform investment – are an important element to stimulate the appropriate and timely investment required to achieve low-carbon and electricity security goals at least cost and, as such, facilitate and support achievement of Sustainable Development Goal 7.
Developing countries tend to follow an established market design even if it is not a proper fit with the country context, industry structure, physical aspects of the power system, or regulatory and institutional capacity. Yet many of these countries, which have limited capacity, low access, and are heavily reliant on fossil fuels, would benefit most from the energy transition. While it may be a challenge to address issues around flexible capacity, ancillary services, and storage and demand response, there are available options that can help developing countries catch up in the energy transition. Regional electricity markets, for example, tend to cover large geographic areas and can bring many benefits to individual countries, from lowering power supply costs to increasing the security of supply to accommodating the deployment of wind and solar power most cost efficiently.