A Proposal for Enabling and Operating Power Systems with High Shares of Renewable Energy

Sebastian Fleitas, Igal E Hendel and Ramon Mendez Galain

No 21952, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: For more than three decades, the energy transition has been driven primarily by climate objectives, but on-shore wind and solar are now the lowest-cost sources of electricity in most markets worldwide, making the case for renewables increasingly economic rather than purely environmental. Despite this, renewable generation continues to fall short of demand growth, not because of technological or cost limitations, but because electricity market rules and regulatory frameworks were designed for systems dominated by thermal generation. As variable renewable energy (VRE) penetration rises, spot energy markets lose their allocative role, capacity mechanisms become more important, and investor risk grows increasingly unpredictable. This paper proposes a new regulatory and market design framework built on three integrated instruments: the use of an open-source, system-wide expansion model that simulates operations across all relevant time scales; periodic technology-specific competitive auctions for long-term contracts; and remuneration schemes tailored to each technology's contribution to system value, with VRE paid per unit of energy delivered under pay-as-produced, take-or-pay contracts. The proposal draws on the experience of Uruguay, which achieved 99.1\% renewable electricity penetration within a decade while cutting generation costs roughly in half, primarily through long-term contracting and minimal reliance on spot markets. We show that this framework requires no more regulation and no less competition than existing systems, and is applicable across monopolistic, competitive, public, and private power sectors. The proposal preserves the role of markets, but investors compete for the market rather than in the market. Achieving high shares of renewable electricity, we argue, is no longer primarily a technological challenge but a matter of regulatory and market design.

Keywords: Market design; Renewable energy; Regulation (search for similar items in EconPapers)
JEL-codes: L51 L94 Q42 Q48 (search for similar items in EconPapers)
Date: 2026-09
References: Add references at CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP21952 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:21952

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP21952

Access Statistics for this paper

More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK.
Bibliographic data for series maintained by CEPR ().