Competitive electricity markets are inherently complex. They require the integration of technically feasible operations, grounded in physical laws, with economically viable solutions that incentivize investments. These interactions aim to ensure a reliable, efficient, and technologically flexible market design. However, the operation of these markets is neither trivial nor perfect. Over time, they are exposed to design imperfections rooted in their foundational mechanisms and regulations. Since these markets operate across different jurisdictions, each with unique spatial, temporal, and regulatory characteristics, their designs vary significantly. There is no one-size-fits-all solution to simultaneously achieve reliability, efficiency, and technological flexibility. Nevertheless, more than two decades of continuous learning have led to notable improvements in their operation.
Market flexibility, particularly from a design perspective, plays an important role in addressing operational imperfections. Market imperfections can be understood through three different dimensions: technological development, response to economic forces, and climate change, especially the impact of extreme weather events. These dimensions have a complex interaction, challenging the status quo of existing market designs. Competitive markets typically operate under either an integrated or simplified model [1].
We consider examples from each dimension. First, the integration of renewable energy sources like wind and solar introduces clean and low-cost power, but also brings operational variability and uncertainty. Second, competition is fundamental in electricity markets; generators aim to maximize profits while minimizing operational risks. However, economic forces can lead to market power, as a form of economic or physical withholding. Third, climate change is increasing the frequency of extreme weather events, pushing electricity markets to their operational limits. To maintain reliability and cost-effectiveness [1], flexible market design becomes essential.
A key signal in competitive markets is the electricity price, a dynamic force driven by a complex pricing mechanism. This mechanism blends spatial and temporal market features, an economic model, and diverse regulatory policies. It must account for physical constraints of the power system elements while providing an economic (least-cost) solution that benefits, ideally, all market participants. These pricing mechanisms follow either a marginal or uniform price, or a pay-as-bid or discriminatory market auction scheme [2]. Electricity prices are estimated under an integrated or simplified market model. Thus, the goals of the (imperfect) market include recovering accurate price signals to guide investment and ensuring operational efficiency in an economically feasible manner.
Market imperfections are a natural consequence of designing complex systems. Moreover, imperfections are agents of change when allowing for a flexible market design. For example, Alberta’s market has seen a steady increase in renewable capacity over the past four years. During this same period, annual congestion costs and energy emergency alerts have also risen [1]. Additionally, scarcity in renewable generation in combination with high demand correlates to high prices [3]. Another consideration is the need to mitigate market power. Mechanisms such as rebidding [4] or redispatch [1], observed in markets like the Australian NEM or Alberta’s, may incentivize generators to exercise market power through withholding. In Alberta, market power mitigation is part of the market design to incentivize capacity investment and ensure resource adequacy [1]. These examples illustrate how market imperfections are not only unavoidable but also instrumental in shaping market evolution.
Price signals and market imperfections should drive investment incentives that ensure a reliable system operation with adequate resources. Moreover, market design should allow for flexibility, an increasingly essential feature in modern electricity markets. Alberta’s market offers a timely example, as it is undergoing significant restructuring, aiming to adopt, among other important market mechanisms, a locational marginal price framework for its energy market. For readers interested in learning more, we recommend exploring the restructured energy market (REM) resources provided by the AESO [5]. This topic may well deserve a dedicated blog post of its own.
This blog has briefly explored key aspects of market design flexibility, emphasizing its role in helping electricity markets to adapt to evolving challenges. While the discussed dimensions are important in the context of electricity markets, they do not capture the full spectrum of technical issues introduced by technological advancement and digitization. The blog also encourages reflection on how market imperfections can act as agents of change in market design. A certain takeaway is that design flexibility and market imperfections are closely intertwined. Ultimately, electricity markets are complex, and as they continue to evolve rapidly, they remain an exciting and essential area of study.
References
[1] D. P. Brown, D. E. H. Olmstead, and B. Shaffer, “Electricity market design with increasing renewable generation: Lessons from Alberta,” The Electricity Journal, p. 107484, 2025
[2] R. Weron, “Electricity price forecasting: A review of the state-of-the-art with a look into the future,” International Journal of Forecasting, vol. 30, no. 4, pp. 1030–1081, 2014.
[3] K. Doering, L. Sendelbach, S. Steinschneider, and C. L. Anderson, “The effects of wind generation and other market determinants on price spikes,” Applied Energy, vol. 300, p. 117316, Oct. 2021.
[4] L. Han, S. Trueck, and I. Cribben, “Extremal Dependence in Australian Electricity Markets,” Journal of Commodity Markets, vol. 39, p. 100476, 2025.
[5] REM Technical Design, AESO Engage, accessed Aug. 21, 2025. [Online]. Available: https://aesoengage.aeso.ca/rem-technical-design
