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Variable generation (VG) such as wind and photovoltaic solar power has increased substantially in recent years. VG has at least four unique characteristics compared to the traditional technologies that supply energy in the wholesale electricity markets. It increases the variability of net load (load minus VG) because its available power changes through time because of the changing source (i.e., wind speed or solar irradiance). VG also increases the uncertainty of the net load because the available power can be only partially predicted at all time horizons. Although it has significant fixed capital costs, VG has near-zero or zero variable production costs because of the free source of fuel. When production-based subsidies exist, this variable cost can be negative. Finally, VG has unique diurnal and seasonal patterns that make it primarily an energy resource. This is because periods of high-energy output may not correspond to times of high demand (or risk of insufficient generation) when considering the power system's resource adequacy requirements. These characteristics create unique challenges in planning and operating the power system, and they can also influence the performance and outcomes from electricity markets. At the same time, electricity market design must be robust enough to allow the market/system operator to make the most efficient use of the system, given the many constraints; thus, the market characteristics must be reflective of the physical nature of the power system. This report provides a comprehensive review of wholesale electricity markets and how the introduction of VG has impacted these markets. The report then focuses on two particular issues related to market design: revenue sufficiency for long-term reliability and incentivizing flexibility in short-term operations. Throughout the report, the authors provide an overview of current design and some designs that have been proposed by industry or researchers. Although certain market characteristics described in this report may point to advantages of specific market design elements, we avoid making specific recommendations in this report.

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It is unclear whether current market designs are incentivizing resources to offer their flexible capabilities to the short-term energy and/or ancillary services market when active power flexibility is needed the most. Flexibility may benefit from new ancillary service market designs, such as pay-for-performance regulation and primary frequency response markets, as well as explicit products for flexible ramping provision of the type proposed in CAISO and MISO.

Demand for affordable, reliable, domestically sourced, and low-carbon electricity is on the rise. This growing demand is driven in part by evolving public policy priorities, especially reducing the health and environmental impacts of electricity service and expanding energy access to underserved customers. Consequently, variable renewable energy resources comprise an increasing share of electricity generation globally. At the same time, new opportunities for addressing the variability of renewables are being strengthened through advances in smart grids, communications, and technologies that enable dispatchable demand response and distributed generation to extend to the mass market. A key challenge of merging these opportunities is market design-determining how to create incentives and compensate providers justly for attributes and performance that ensure a reliable and secure gridin a context that fully realizes the potential of a broad array of sources of flexibility in both the wholesale power and retail markets.This report reviews the suite of wholesale power market designs in use and under consideration to ensure adequacy, security, and flexibility in a landscape of significant variable renewable energy. It also examines considerations needed to ensure that wholesale market designs are inclusive of emerging technologies, such as demand response, distributed generation, and distributed storage. The report concludes with a review of potential areas for future research on wholesale power markets.