Small Systems, Big Targets: Power Sector Reforms and Renewable Energy in Small Systems

Abstract

There is some consensus that the traditional energy-only electricity markets, where prices are based on system marginal cost, cannot function efficiently with both fossil fuels and renewables, resulting in market disruptions and price volatility. Consequently, much effort has been focused on how to integrate these different resources in larger and mature electricity systems such as the use of capacity markets in addition to energy-only markets. This paper argues that the effectiveness of competition is limited by the size of an electricity system and there is a threshold size (and associated characteristics such as tropical locations, lack of access, and the prevalence of remote communities of consumers) below which competition will not produce the expected outcomes. This paper contributes to the policy discourse by discussing the reform of small electricity systems to integrate renewable energy via the means of three case studies: Nicaragua, El Salvador, and Australia's Northern Territory. The paper concludes that electricity reforms and renewables can be complementary in small systems when supported by appropriate instruments and incentives. We draw policy lessons for other small systems that are pursuing a triad of objectives including electricity reform, large-scale renewables development and improving energy access.