• Decarbonization creates significant changes in the characterization of the grid from resource mix to demand composition • Such changes bring many challenges to both system and market operations in terms of reliability, efficiency and complexity. • To support such transition to the future grid, both operational enhancements and alignment of market structure are needed.

1. Tongxin Zheng
Director, Advanced Technology Solutions
ISO New England, Inc.
tzheng@iso-ne.com
Clean Energy Transition –
Challenges and Opportunities

2. • Independent System Operator
– Power System Operation
– System Planning
– Market Administration
• Located at the northeast of the US
– Serving six states with 14 million people
– 9,000 miles high voltage transmission lines
– 31,500 MW installed capacity
– Peak demand – 28,130 MW
– $5.7 billion (Energy and Capacity markets) in
2020
About ISO NE

3. Historical Resource Mix in ISO NE

4. • Supply
– Renewables (Wind
and Solar)
– Storage Resources
– Distributed Energy
Resources
• Demand
– Energy Efficiency
– Electrification of
transportation and
heating sectors
Changes Under Decarbonization

5. Resource Mix of Future Grid

6. • Wind and solar generation output are weather
dependent.
• Load forecasting accuracy has been declining in
the past few years, before the introduction of
solar forecasting in the ISO NE region.
• Fluctuation of the renewable generation
increases the system operational risk.
High Level of Uncertainty

7. • Significant amount of solar PV are behind the
meter and are not dispatched by the
transmission system operator.
• DERs are often not observable, and their impact
on the transmission operation may be non-
predictable.
• Controlling massive number of DERs at the ISO
level is far too complicated and inefficient.
Grid Complexity

8. • Efficient operation of
Storage resources
depends on the
information of multiple
market intervals.
• The charge and
discharge cycle needs
to be determined
simultaneously.
Tightened Market Coupling
Coupling
Charge
Discharge
Time

9. • Solar integration
reshapes the load
curve
• Electrification of
transportation and
heating sectors
introduces new
customer behavior.
Load Pattern Changes

10. • Winter operation can be challenging
– Heating demand depletes natural gas, leaving
no gas for gas generators from pipeline in the
past
– LNG availability requires advanced
arrangement
– Cold temperature and snow coverage often
reduce solar generation significantly
– Cold weather also makes the off-shore wind
unavailable
Extreme Weather and Energy
Security

11. Putting things together
Decarbonization
Renewables DER Storage Electrification
Uncertainty Complexity Dynamic
Managing Risk Increasing Flexibility Ensuring Adequacy
Risk-based
Operation
Pricing
Risk
Considering
System
Resilience
Situation
Awareness
DER
Market
Participation
Model
Efficient
Storage
Market
Participation
Model
Developing
Flexibility
Product
Scarcity
Pricing
Incorporating
Flexibility
Attribute
Carbon
Pricing
Security Adequacy
Coordination
and
Co-simulation
Reducing Complexity
Decentralized
Control
Coordination
and
Cosimulation
Advanced
Computing
Technology

13. • Power system operation is basically a risk-
management process.
– Balancing supply and demand
• Current security standards for system operation
such as N-1 are often deterministic
– Limited to a small set of events and silent on the
renewable generation
– Failed to consider the event probability
– Do not consider the event impact
– No consideration of cost vs. reliability benefit
• Risk-based approach should strike a better
balance between cost and reliability
1. Managing Risk – Risk-based
Operation

14. • Reflecting risk management practices into the market clearing brings
many benefits
– Market transparency
– Explicit trade-off between cost and reliability
– Financial incentives to dispatch-following and risk mitigation investment
• One possible design is reserve demand curve
– Lack of demand side participation creates misalignment in the risk-cost
trade-off
– An approximation of stochastic programming
– Recognize the value of reserves and provide additional revenue to
supply
• Challenges
– The approximation approach in the multi-dimensional space is not
uniquely defined
– How to extended it to different products and services (transmission,
corrective actions etc.) is unknown
1. Managing Risk – Pricing Risk

15. • Extreme events create significant stress to the
system
– Low probability and high impact
– Man-made or natural disaster
– Affecting multiple systems
• Transmission system resilience
– Cascading failures
– Dispatch with resilience constraints
• Supply system resilience
– Introducing market products to ensure fuel
procurement
– Multi-day-ahead markets for better utilization of fuel
1. Managing Risk – Addressing
System Resilience

16. • Weather-dependent risk assessment
– Capability to assess the system risk based on
conditional probability
– Cascading failure assessment
• Energy security awareness
– Energy inventory monitoring
• Oil, Storage state of charge
– Gas pipeline system monitoring
– LNG conditions
1. Managing Risk – Situation
Awareness

17. • DER brings many benefits to the grid
– Economic benefits – deferred transmission investment, loss reduction,
cost reduction
– Grid flexibility – resilience, fuel diversity, ancillary services
• DER aggregation should be allowed to participate in
electricity markets, realizing these benefits in a controllable
fashion as well as avoiding complexity
• Efficient DER market structure needs to be set up
considering both transmission and distribution operations:
– Regulatory policy
– System Operation
– Market and compensation
• Local vs. Wholesale Markets
• DLMP
2. Increasing Flexibility – DER
Participation

18. • Peak shaving capability of storage resources
flattens the electricity demand curve, reducing the
flexibility needs from other resources.
• Current model for storage participation in
wholesale markets
– Focused on self-management of the state of charge,
posing reliability risk to the system operation in the
future
• A better participation model recognizing the value
of storage and system reliability needs is required.
2. Increasing Flexibility – Storage
Participation

19. • Introducing flexibility products in the
wholesale market
– Flexibility attributes need to be well defined
• Ramp, reserves, options etc.
• Co-optimization and multiple-period pricing
– Achieving social welfare maximization
– Coordination in scheduling – increasing system
reliability
– Coordination in pricing – increasing dispatch
incentives
– Reduce opportunity cost compensation
2. Increasing Flexibility – Flexibility
Procurement

20. • Zero-marginal cost resources
– Zero or negative energy prices
– Marginal prices as an investment signal
– Insufficient revenue from energy market
• Is scarcity pricing a solution?
– Pricing emergency actions
– Operating reserve demand curve
3. Ensuring Adequacy – Scarcity
Pricing

21. • Forward capacity market
– A market solution to the “missing money” issue
• Capacity market enhancements
– Compensation based on marginal reliability
contribution
– Flexibility attribute
– Fuel security attribute
– Emission attribute
– Extreme event modeling
– Transmission improvement
3. Ensuring Adequacy – Capacity
Market

22. • Cap and trade program
• Carbon tax
• Carbon pricing for other sectors
• Alignment of carbon pricing with electricity
markets
3. Ensuring Adequacy – Carbon
Pricing

23. Conclusions/Recommendations
• Decarbonization creates significant changes in
the characterization of the grid from resource mix
to demand composition
• Such changes bring many challenges to both
system and market operations in terms of
reliability, efficiency and complexity.
• To support such transition to the future grid, both
operational enhancements and alignment of
market structure are needed.

24. Received: 29 June 2020 Accepted: 29 September 2020 Energy Conversion and Economics
DOI: 10.1049/enc2.12020
REVIEW
Electricity market regulation: Global status, development trend,
and prospect in China
Chengwei Xu1
Fushuan Wen1,2
Ivo Palu2
1
College of Electrical Engineering, Zhejiang
University, Hangzhou, China
2
Department of Electrical Power Engineering and
Mechatronics, Tallinn University of Technology,
Tallinn, Estonia
Correspondence
FushuanWen, CollegeofElectricalEngineering,
ZhejiangUniversity, Hangzhou 310027, China.
Email: fushuan.wen@gmail.com
Fundinginformation
NationalNaturalScienceFoundationofChina,
Grant/AwardNumber: U1910216
Abstract
With ever-growing electricity consumption, unwanted climate change, and evolving gen-
eration mix, some energy policies related to electricity markets are enforced in various
countries to cope with emerging challenges in the energy sector. Electricity market regu-
lation, which is required to keep pace with the continuous development of power industry
restructuring and electricity market operation, is also evolving. To help researchers and
policy makers have a better understanding of the state-of-the-art electricity market regu-
lation, the aim is to survey the latest progress, as well as the development trends in this
field in the United States, Australia, United Kingdom, and France, which have mature and
widely recognized electricity markets around the globe. Subsequently, the progress of the
electricity market reform in China is described, and the status, drawbacks, and prospect
of the electricity market regulation in China presented.
1 INTRODUCTION
The vertically integrated electrical power industry was broken
up into discrete parts of the supply chain in 1980s in some
countries, and electricity markets were then developed as the
most significant milestone of power industry restructuring [1].
While the electricity network sector remains monopolized, gen-
eration and retail sectors have been open to market competi-
tion in many developed countries during the past 30 years. As
a result of marketization, generation assets are better employed,
electricity trading could be implemented in a large geographi-
cal area and even across various countries, and consumers are
provided with more choices of power supply arrangements [2].
On the other hand, some problems associated with electricity
markets, such as market power abuse, fairness and adequacy
of market competition, market transparency, need to be well
resolved. Therefore, market regulation is needed to protect the
public interest against market failure, and to promote social
welfare. Since electricity markets are evolving, market regula-
tion, which is required to keep pace with the market mech-
anism and operation, is also facing new problems or even
challenges.
Some developing countries, including China, are still explor-
ing their paths to electricity marketization, as well as the
This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction in any medium, provided the original work is
properly cited.
© 2020 The Authors. Energy Conversion and Economics published by John Wiley & Sons Ltd on behalf of The Institution of Engineering and Technology and the State Grid Economic &
Technological Research Institute Co., Ltd.
development of electricity market regulation systems [3]. Inter-
national experience on electricity market regulation from mature
electricity markets around the globe can be learned by those
countries undergoing power industry restructuring, with the
characteristics of each country taken into account.
Nevertheless, comparisons among existing designs of elec-
tricity market regulation are often hindered by new develop-
ments, as well as the practice in which details about electricity
market regulation are often embedded in a multitude of docu-
ments on various websites of regulators. Given this background,
it is the objective of this paper to systematically overview differ-
ent electricity market regulation systems and present the devel-
opment trends of electricity market regulation.
In this work, the prevailing regulation systems in four
developed countries, including the United States, Australia,
United Kingdom, and France, are first surveyed, covering the
regulatory authority, legislative framework, wholesale market
regulation, retail market regulation, and regulatory approach.
Subsequently, the development trends of electricity market
regulation are discussed with respect to several issues of exten-
sive concerns around the globe. Then, the progress of elec-
tricity market reform in China is presented. Finally, the status
and drawbacks of electricity market regulation in China are dis-
cussed, and prospect for the future development presented.
Energy Convers. Econ. 2020;1:151–170. wileyonlinelibrary.com/iet-ece 151

25. 152 XU ET AL.
FIGURE 1 Regulatory authorities in the United States
A list of abbreviations used in this paper is presented in
Table 1.
2 REGULATORY SYSTEM
The first and most fundamental part of electricity market reg-
ulation is the regulatory system. A well-designed regulatory
system may take decades to develop and improve, and could
greatly promote the efficiency and effectiveness of the reg-
ulation. Generally, an electricity market regulatory system is
basically comprised of two parts: (i) one or multiple regula-
tory authorities responsible for carrying out regulation activities
or enforcements to protect participants in the electricity mar-
ket; (ii) legislations that grant specified power to the regulatory
authority.
2.1 Regulatory authorities
The regulatory authorities can be either a part of, or inde-
pendent from executive branches of the government; this
would determine how decisions of the regulators are made and
implemented.
The electricity market regulation in the United States is
enforced by multiple federal and state governmental bodies
with some degree of coordination. Federal and state regulatory
authorities regulate certain aspects of the U.S. electric power
industry, and a two-level regulatory framework is implemented
[4,5,6], as shown in Figure 1.
Currently, there are seven regional electricity markets in the
United States, with each of them having its own Independent
System Operator (ISO) and Regional Transmission Organi-
zation (RTO). FERC authorizes ISOs/RTOs the power to
operate and monitor their electricity markets and protects
the independence of the decision process of ISOs/RTOs. In
addition, ISOs/RTOs are required to have an internal or third-
party organization as the Market Monitoring Unit (MMU). The
MMU monitors the electricity market and reports directly to
FERC and boards of the ISO. It is worth noting that, the power
TABLE 1 List of abbreviations and their descriptions
Abbreviation Description
European Union
ACER Agency for the Cooperation of Energy Regulators
CEER Council of European Energy Regulators
EC European Commission
MAD Market Abuse Directive
REMIT Regulation on Wholesale Energy Market Integrity
and Transparency
Australia
ACCC Australian Competition and Consumer
Commission
AEMC Australian Energy Market Commission
AEMO Australian Energy Market Operator
AER Australian Energy Regulator
CCA Competition and Consumer Act
COAG Council of Australian Governments
NECF National Energy Customer Framework
NEL National Electricity Law
NEM National Electricity Market
NER National Electricity Rules
NERL National Energy Retail Law
NERR National Electricity Retail Rules
China
NDRC National Development and Reform Commission
NEA National Energy Administration
France
CoRDiS Comité de Règlement des Différends et des
Sanctions
EDF Electricité de France
FCA French Competition Authority
Law NOME Law Nouvelle Organisation du Marché de
l’Electricité
CRE Commission of Regulation of Energy
United Kingdom
GEMA Gas and Electricity Markets Authority
OFGEM Office of Gas and Electricity Markets
United States
CAISO California ISO
DOE Department of Energy
ERCOT Electric Reliability Council of Texas
FERC Federal Energy Regulatory Commission
FPA Federal Power Act
ISO Independent System Operator
ISO-NE ISO New England
MISO Midwest ISO
MMU Market Monitoring Unit
NERC North American Electric Reliability Corporation
NRC Nuclear Regulatory Commission
(Continues)

26. XU ET AL. 153
TABLE 1 (Continued)
Abbreviation Description
NYISO New York ISO
PJM Pennsylvania-Jersey-Maryland Interconnection
PUC Public Utilities Commission
PURPA Public Utilities Regulatory Policy Act
RTO Regional Transmission Organization
SPP Southwest Power Pool
TABLE 2 Regulators and monitors of the regional electricity markets in
the United States
Market monitoring unit
Regulator
Reliability
standards
regulation ISO/RTO Internal External
FERC NERC MISO / Potomac economics
ISO-NE ✓ Potomac economics
NYISO ✓ Potomac economics
PJM / Monitoring analytics
SPP ✓ /
CAISO ✓ The Market Surveillance
Committee
Texas PUC ERCOT ERCOT / Potomac economics
system in Texas is generally considered as an independent sys-
tem, and the electricity market regulation in Texas is enforced
by the Texas Public Utilities Commission and the Electric
Reliability Council of Texas (ERCOT) [7], rather than FERC.
Main regulatory authorities in the United States are listed in
Table 2.
Four governmental bodies are mainly responsible for regu-
lating the electric power industry in Australia [8,9]: the Coun-
cil of Australian Governments Energy Council (COAG Energy
Council), Australian Energy Market Commission (AEMC),
Australian Energy Market Operator (AEMO), and Australian
Energy Regulator (AER), as shown in Figure 2.
The Gas and Electricity Markets Authority (GEMA) has the
primary responsibility for regulation of the energy sector in
United Kingdom. GEMA is constituted of a working group
FIGURE 2 Regulatory authorities in Australia
appointed by the Secretary of State at the Department for Busi-
ness, which ensures its independence and limited stakeholder
participation. GEMA operates through its office, the Office
of Gas and Electricity Markets (OFGEM), to which it dele-
gates its functions and provides with strategic directions and
oversights [10]. OFGEM is therefore more commonly referred
to as the energy regulator of United Kingdom. OFGEM
is required to create a level playing field for the electricity
wholesale and retail markets, and regulate transmission and
distribution networks at the same time. In United Kingdom,
industry licenses are required before companies conduct their
generation, transmission, distribution, or sale of electricity. Such
licenses are issued by OFGEM following the evaluation of the
company’s eligibility. OFGEM is also authorized the power to
determine and modify the conditions in the license, monitor
the license-holder’s compliance with defined conditions, as
well as various industry codes and standards. When necessary,
OFGEM also takes enforcement actions to penalize market
violations.
With the evolvement of the integrated European electricity
market, the French electric power industry gradually moves
towards marketization. In March 2000, in accordance with
the European Union’s requirements of the electricity market
reform, the French Electricity Regulatory Commission was
established to ensure that the electricity markets in France
function smoothly. In 2003, the French Electricity Regulatory
Commission was renamed the Commission of Regulation
of Energy (CRE), with the function of natural gas market
regulation added [11]. The Dispute Settlement and Sanctions
Committee, known by its French acronym “CoRDiS” (Comité
de règlement des différends et des sanctions), is an independent
body of CRE, tasked with settling disputes concerning access to
and use of the public electricity and gas networks, and imposing
sanctions on violations of the Energy Code. In addition, the
French Competition Authority (FCA) also has the power to
prevent and sanction anticompetitive practices in any economic
sector [12].
Since United Kingdom and France are members of the
European Union, their electricity market regulations are also
enforced by the Council of European Energy Regulators
(CEER). In order to promote the establishment of the inte-
grated European electricity market, the European Commission
(EC) released the “Third Energy Package” and established the
Agency for the Cooperation of Energy Regulators (ACER) [13].
ACER has the function of cross-border regulation and works
in cooperation with the national regulatory authorities of EU
member countries.
2.2 Legislation
The establishment of an electricity market regulatory system
covers much more issues than setting up a market regulator.
Supports and restrictions from the legislation are demanded. A
rule-based regulation, instead of administrative orders, is one of
the main features of the electricity market regulation, making it
different from the regulation of traditional vertically integrated

27. 154 XU ET AL.
TABLE 3 Key laws and orders in the U.S. electric power industry regulation [14]
Year Laws/orders Substance
1935 Federal Power Act Grant the authority of FERC
Lay the foundation of electric power industry regulation in the United States
1978 Public Utilities Regulatory Policy Act Grant the authority of state-level PUCs in retail regulation and in siting approvals for new energy facilities
1992 Energy Policy Act (EP Act 92) Foundation of the market competition in electricity sector
1996 FERC Order 888/889 Unbundle the electric power wholesale service from transmission service
Require open and non-discriminatory access to transmission service
Encourage the formation of ISOs
1999 FERC Order 2000 Introduce the concept of RTOs and encourage transmission owners to participate in them
Enhance the independence of ISOs
2005 Energy Policy Act (EP Act 05) Enhance the regulatory power of FERC
Regulations on preventing market manipulation in wholesale electricity markets
2007 FERC Order 890 Remedy on Order 888/889
Require transparency on transmission planning
2008 FERC Order 719 Require each electricity market to have a market monitoring unit
utilities. It is demonstrated by international experience that
legislation always plays an important role in the marketization
process of the electricity sector.
Over the last three decades, a number of laws and orders
have significantly promoted the market competition in the U.S.
electricity sector, and are therefore considered as milestones in
the development of the U.S. electric power industry, as listed
in Table 3. Apart from laws and acts, FERC has continuously
issued more than 400 orders and regulations to address new
challenges with the market evolvement since 1996, covering
market access, transfer of control, license application, transmis-
sion planning, transmission and distribution cost allocation, reli-
ability standards, and others [15].
The legislative framework of the Australian National Elec-
tricity Market (NEM) consists of four legislative schemes: the
National Electricity (South Australia) Act 1996, the National
Electricity Law (NEL), the National Energy Retail Law
(NERL), and Competition and Consumer Act (CCA). Gener-
ally, NEL regulates the wholesale electricity market and elec-
tricity network, and determines the scope of function and
authority of AEMC, AEMO, and AER. In accordance with
NEL, the National Electricity Rules (NER) are formed and
applied on the economic regulation of the wholesale electric-
ity market, including market operation, power system security,
transmission network planning, access, and cost allocation [16].
Correspondingly, issues related to retail electricity markets are
regulated by NERL, under which the National Electricity Retail
Rules (NERR) and the National Energy Customer Framework
(NECF) are formed. NERR and NECF regulate the distribu-
tion and sale of electricity to end users. In jurisdictions that have
not implemented NECF (Victoria, Western Australia, and the
Northern Territory), the state and territory governments remain
responsible for retail authorization, compliance monitoring and
market performance reporting [9].
The regulatory framework in United Kingdom operates
through a cooperation of legislation, licenses, and industry
codes. The Electricity Act 1989 is the main legislation in the
electricity sector, under which the licensing regime is established
and statutory duties of GEMA and OFGEM set out. Other
key legislations include the Utilities Act 2000, Competition Act
1998, Enterprise Act 2002, and Energy Acts 2011, providing
OFGEM the power and responsibility to monitor the electricity
market, setting policy priorities and making decisions on a wide
range of regulatory matters. In addition, various industry codes
(e.g. Balancing and Settlement Code, Distribution Code, Retail
Energy Code [17]) establish rules that restrict electricity market
operation, as well as terms of connection and access to electric-
ity networks. These industry codes are executed by the licenses,
which contain conditions that license holders must comply with,
such as conditions on compliance with industry codes and stan-
dards. One of the main functions of OFGEM is to determine
the conditions of electricity licenses, and to grant licenses to eli-
gible applicants.
In France, many laws and regulations governing the elec-
tricity market are transposed from EU directives. For example,
French Law No. 2000-108 on modernization and development
of electricity public service is transposed from EU Directive
96/92/EC. According to Law No. 2000-108, industrials con-
suming more than 16 GWh per year were allowed to choose
their electricity suppliers, the power grids were no longer
directly operated by Electricité de France (EDF), and CRE
was established as an independent regulator of the electricity
market [18]. After the European Commission’s release of the
“Third Energy Package”, which was transposed into French
law in December 2010 by a new law commonly referred to
as “Law Nouvelle Organisation du Marché de l’Electricité”
(Law NOME) [19], to further open up the energy market, the
obstacles to the development of the French electricity market
was removed. In 2011, the French Energy Code was created
by Ordinance No. 2011-504, finalizing the transposition of the
EU electricity directives [20]. The French Energy Code covers
many sectors related to energy, such as electricity, natural gas,
renewable energy, hydropower, petroleum, heating and cooling
networks [21].

28. XU ET AL. 155
TABLE 4 Comparisons of electricity market regulatory systems in four developed countries
Country
Market
regulator Higher office
Market rule
maker Market operator
Key legislation (wholesale
market)
Key legislation (retail
market)
United States FERC/
State PUCs/
ERCOT/
MMU/
NERC
DOE ISOs/RTOs ISOs/RTOs Federal Power Act (1935);
Energy Policy Act
(1992/2005);
FERC Order 888/889 (1996);
FERC Order 2000 (1999);
(Other FERC Orders).
Public Utility Regulatory
Policies Act (1978);
States Administrative Rules.
Australia AER (COAG) Energy
Council
AEMC AEMO National Electricity Law
(1996) (National Electricity
Rules);
Competition and Consumer
Act (2010).
National Energy Retail Law
(2011) (National
Electricity Retail Rules);
Competition and Consumer
Act (2010).
United Kingdom OFGEM GEMA
ACER
OFGEM/
EC
NASDAQ-OMX Group/
Amsterdam Power
Exchange
Electricity Act (1989); Competition Act (1998);
Utilities Act (2000); Enterprise Act (2002);
A number of Energy Acts; Industry Codes;
(EU Directives).
France CRE/
CoRDiS/
FCA
French Parlia-
ment/ACER
French Par-
liament/
CRE/EC
European Power
Exchange/
European Energy
Exchange
French Energy Code (2011); Law NOME (2010);
Regulated Access to the Historical Nuclear Electricity
(ARENH);
(EU Directives).
In addition to national laws and regulations, the ruling of the
electricity markets in United Kingdom and French also needs to
stay in line with EU legislations. Until late 2011, the key piece
of anti-market manipulation legislation in EU was the Market
Abuse Directive (No. 2003/6/EC) (MAD), predated the cre-
ation of the EU’s nascent wholesale energy markets [22]. Since
MAD was designed to prohibit market abuse in EU’s finan-
cial markets, in which commodity trading like electricity and
gas trading is not covered, the EC presented the Regulation on
Wholesale Energy Market Integrity and Transparency (REMIT)
on December 8, 2010 [23]. From that day on, OFGEM and
CRE have been required to implement market registration, pro-
mote information disclosure, prohibit insider trading and mar-
ket manipulation in the wholesale electricity market.
2.3 Summary
Comparisons among electricity market regulatory systems in
four developed countries are presented in Table 4. As detailed
in this table, an independent regulatory body is established in
countries with mature electricity markets to regulate their elec-
tricity sectors at the federal level. In vast countries like the
United States, state level regulators and other regulatory bod-
ies are created to jointly regulate specific issues of the electricity
sectors concerned. Regulators sometimes participate in market
rules making but typically do not involve in market operations,
and are all given with legislative guarantees on their authority as
well as the scope of functions. Therefore, the decision-making
process of the regulator can be independent from stakeholders.
Basically, power industry restructuring is usually driven by leg-
islations rather than administrative orders, and hence is more
capable of overcoming the obstacles in the implementation
procedure.
3 ELECTRICITY MARKET
REGULATION
3.1 Wholesale electricity market regulation
The deregulation of the electric power industry does not mean
the absence of regulation. Instead, the focus of the electric
power industry regulation is shifted to address the emergent
problems along with the marketization, such as market power
control, market performance assessment, and generation capac-
ity adequacy. International experience shows that the priority
of the electricity market regulation can be different as the elec-
tricity market mechanism differs from country to country. The
wholesale electricity market in Australia is typically a “gross
pool” market, in which all electricity is traded in the pool, with
financial instruments utilized to manage the risk [24]. Whereas,
United Kingdom and France adopt the “net pool” market, also
called the bilateral trading market, in which trading via the pool
is optional and the majority of electricity is traded via bilat-
eral contracts [25]. There are several electricity markets in the
United States, and both pool-based and bilateral trading modes
are employed. In some aspects of regulation, like market access
and transfer of control, regulators in different countries adopt
remarkably similar methods. However, in term of market mon-
itoring and market power control, customized strategies are
adopted in various electricity markets.
Under the “gross pool” market structure, the key of market
monitoring is the prevention and prohibition on market power
abuse and market manipulation. In the United States, three
bodies, FERC, ISO/RTO, and MMU, supervise the wholesale
electricity market on different levels. The office of enforce-
ment in FERC screens a large number of public and non-public
data and uses market indicators to identify market anoma-
lies [26]. Meanwhile, the ISO/RTO of each regional electricity

29. 156 XU ET AL.
market also sets up market monitoring department to internally
monitor the market operation. Moreover, the MMU of each
regional electricity market is granted by FERC the function
and authority of market monitoring, information disclosure,
and market design [27]. The MMU monitors, investigates, and
assesses the operation of the wholesale electricity market exter-
nally, and then releases state-of-market reports on quarterly and
yearly basis to disclose the performance of electric energy mar-
kets, capacity markets, ancillary service markets, grid conges-
tion, and network losses, and others [28]. Based on the reports,
recommendations for revising electricity market design are pro-
posed to the regulatory authority as well by MMU. In CAISO
and PJM electricity markets, the “Three Pivotal Supplier (TPS)”
test is adopted to control the potential market power of gener-
ation companies. Besides, in the PJM market, generation units
committed in the day-ahead market are only allowed to lower
their offer price in the real-time market.
In Australia, AER monitors the wholesale electricity market
and keeps a high frequency of reporting under the requirement
of NER. AER reports on the status of the wholesale electricity
market to market participants and the public on a weekly and
quarterly basis, which covers the spot market clearing prices,
biddings, ancillary services, and wholesale market violation with
detailed investigation and analysis. The spot price in NEM is
subject to a market price floor limit (−$1000/MWh), and a mar-
ket price cap ($15,000/MWh), which are reviewed every 4 years
to ensure they be in line with the NEM reliability standards and
adjusted annually according to changes of the consumer price
index. Every presence of extreme price (above $5000/MWh)
would be reported, along with further analysis that identifies
the factors contributing to the high price. However, there is
almost nothing that effectively prevents generators to bid their
generation outputs at high prices, as they can change their bids
up until the start of the 5-min dispatch [29]. Therefore, the
NEM has limited day-ahead visibility of the bids. Although lack
of bidding restrictions, AER typically focuses on some form of
withholding behaviours of generation companies (e.g. physical
withholding or economic withholding) at times of high demand
or curtailed supply, which may undermine the effectiveness of
competition and market efficiency. A set of market monitor
indices based on the “Structure-Conduct-Performance” (SCP)
framework is designed to reflect on behaviours of the market
participants, as well as the market operation performance [30].
The European Commission has been making significant
efforts to develop an integrated European electricity market.
After the electricity markets in South Western Europe and
North Western Europe were coupled in May 2015, the cross-
border electricity flows in EU are optimized and price dif-
ferences across EU greatly smoothed out [31]. Both United
Kingdom and France adopt a bilateral trading market struc-
ture. As there is only a small amount of electric power traded
through the gross pool, the risk of market power abuse of par-
ticipants is greatly reduced. Therefore, currently there is no
ex-ante market power mitigation mechanism like TPS test in
United Kingdom and France [28]. Instead, ex-post punishment
for market manipulation by using system constraints or conges-
tions would be imposed, such as financial penalty and license
revoking. According to MAD, market manipulation, examples
of which include “Fraud-based” behaviours, giving misleading
signals, and market power abuse, is strictly prohibited. Another
type of behaviour prohibited by MAD is trading on inside infor-
mation that has not been made public [32]. REMIT has over-
come the defects in MAD’s inapplicability in electricity market
regulation, and adopted a language more specific to the nature
of electricity markets. Four key issues are included in REMIT:
prohibition on insider trading and market manipulation, obliga-
tion on market registration, obligation on information disclo-
sure, and establishment of ACER [23]. The definition of mar-
ket manipulation within REMIT is essentially the same as that
within MAD but more specific, including: (i) creating misleading
information about supply, demand, or prices; (ii) intentionally
spreading relevant false information; (iii) using misleading infor-
mation to conduct fraud; (iv) manipulating the price of energy
wholesale commodities.
Moreover, in order to promote the wholesale electricity mar-
ket competition in France and weaken the monopoly position
of EDF, Law NOME requires EDF to sell a great amount of
nuclear power (25% of EDF’s nuclear fleet or a maximum of
100 TWh) to its competitors at a CRE-regulated price every
year, allowing French consumers to continue to benefit from
the competitiveness of the French nuclear fleet [33].
Main aspects of wholesale electricity market regulation in the
United States, Australia, United Kingdom, and France are pre-
sented in Table 5.
3.2 Retail electricity market regulation
Competition was first introduced into the electricity retail sec-
tor in 1990s, separating the supply business of electricity from
transmission and distribution service. Since then, consumers
have been provided with free choices of their electricity suppli-
ers [40]. With the electricity retail sector open to competition,
new requirements for retail electricity market regulation also
emerge, including retail electricity market access, information
disclosure, last resort supply, credit management, and others.
In the United States, electricity retailing regulation is gov-
erned at the state level. The state-level PUCs set out policies
and regulations of retail electricity markets, which are differ-
ent among various states, and have jurisdiction over the sup-
ply of electricity. The scope of this jurisdiction depends on
whether the state adopts retail competition. In states open to
electricity retail competition, electricity consumers are able to
purchase electricity at market-based prices from competitive
suppliers other than a franchised public utility. The state-level
PUCs generally do not regulate electricity prices set by com-
petitive suppliers, but license the suppliers and impose other
conditions on them instead [41]. The retailing price, terms, and
conditions associated with franchised public utilities are still reg-
ulated by the state-level PUCs. However, most states in the
United States have not yet opened to electricity retail com-
petition. After the California electricity crisis, further efforts
on electric power industry restructuring at the retail level in
the United States came to a standstill and electricity retail

30. XU ET AL. 157
TABLE
5
Main
aspects
of
wholesale
electricity
market
regulation
Country
Market
access
Transfer
of
control
Anti-manipulation
United
States
∙
Market
entrance
needs
authorization
from
FERC
∙
Market
access
restrictions
on
company
assets,
financial
status,
and
technical
qualification
∙
Within
FERC’s
regulation,
regional
electricity
markets
can
adjust
the
market
entrance
barriers
with
respect
to
the
market
structure,
operating
strategy,
and
risk
preference
[34]
∙
Mergers,
acquisitions,
and
other
transfer
of
control
need
approvals
from
FERC
∙
FERC
evaluates
a
proposal’s
effect
on
competition,
rates,
regulation,
and
cross-subsidization
to
make
sure
the
proposal
is
in
the
public
interest
∙
In
some
states,
transfer
of
control
also
needs
approvals
from
the
state
PUC
[35]
∙
FERC,
ISO/RTO,
MMU
jointly
monitor
the
wholesale
electricity
market
to
prevent
market
power
abuse
and
market
manipulation
∙
“Three
Pivotal
Supplier”
test
(CAISO/
PJM)
∙
Withholding
behaviour
is
strictly
prohibited
∙
Generation
units
committed
in
the
day-ahead
market
are
only
allowed
to
lower
their
offer
price
in
the
real-time
market
(PJM)
Australia
∙
AER
controls
market
access
restrictions
by
requiring
licenses,
covering
financial
and
technical
qualification
∙
Construction
of
generating
facilities
needs
approvals
from
state
regulatory
authority
∙
Transfer
of
control
needs
to
pass
a
“future
with-and-without”
test
under
CCA
to
analyse
its
effect
on
market
competition
in
different
scenarios
[36]
∙
AER
monitors
the
wholesale
electricity
market
and
releases
state-of-market
reports
weekly
∙
AER
reports
for
every
extreme
price
(above
$5000/MWh)
∙
Withholding
behaviour
is
not
strictly
prohibited
United
Kingdom
∙
A
license
from
OFGEM
is
required
∙
License
contains
conditions
that
license
holders
must
comply
with
[37]
∙
In
the
event
of
a
no-deal
Brexit,
the
additional
OFGEM
certification
requirements
for
transmission
and
interconnectors
will
apply
to
participants
who
are
not
from
the
United
Kingdom
[38]
∙
Transfers
of
control
need
to
be
notified
to
the
EC
before
their
implementation
as
the
EC
has
jurisdiction
over
concentrations
with
a
community
dimension
∙
The
incoming
party
has
to
meet
the
license
obligations,
and
follows
a
similar
vetting
process
as
that
for
a
new
applicant
[38]
∙
ACER
implements
prohibition
on
insider
trading
and
market
manipulation,
obligation
on
market
registration,
and
obligation
on
information
disclosure
according
to
REMIT
∙
Typical
market
manipulations:
1.
creating
misleading
information
about
supply,
demand,
or
prices
2.
intentionally
spreading
relevant
false
information
3.
using
misleading
information
to
conduct
fraud
4.
manipulating
the
price
of
energy
wholesale
commodities
∙
Power
generation
from
existing
nuclear
plants
owned
by
EDF
can
be
bought
by
new
suppliers
at
a
regulated
price
France
∙
Any
company
can
build
and
operate
a
generating
station,
provided
that
it
obtains
the
required
authorizations,
including
environmental
and
planning
permits
[12]
∙
Transactions
do
not
meet
the
EC’s
merger
regulation
thresholds
must
be
notified
and
supervised
by
the
FCA
[39]
∙
The
French
Energy
Code
requires
that
the
French
state
must
hold
at
least
70%
of
the
capital
and
voting
rights
of
EDF
[32]

31. 158 XU ET AL.
competition was suspended or rescinded in several states [42].
As of end of 2018, only 16 states and the District of Columbia
allowed for electricity retail competition [35]. The retail electric-
ity market in Texas is one of the most successful retail elec-
tricity markets in the United States. The Texas PUC approves
the revenue requirements of electricity retailing companies, and
appraises the electricity prices or rates of various consumers.
Information disclosure is jointly enforced by the market oper-
ator and state-level regulator. The market operator dynamically
updates and discloses market data to the public by employing
information from relevant websites and data release platforms,
such as market capacity and transaction results, while the state-
level regulator takes responsibility for the market performance
analysis and reports.
In Australia, the AER has assumed responsibility for regulat-
ing retail energy markets in jurisdictions with NECF adopted
since July 2012. In terms of retail market access, AER assesses
applications for national retailer authorizations from businesses
that want to become energy retailers to ensure that the appli-
cants have sufficient technical capacity and financial resources.
As for retail price regulation, there are two classes of market
customer contracts in Australia, the standing retail contracts
and market retail contracts [36]. Standing retail contracts are
basic contracts with a regulated contract price for residential
and small business customers who do not negotiate a market
retail contract. Market retail contracts are negotiated between
customers and retailers, the price of which is deregulated and
set by the retailer, rather than the regulator. Nevertheless, AER
provides a price comparison guide on its website “Energy Made
Easy”, to provide customers with visibility of costs and charges
across different suppliers [43]. By this way, AER aids competi-
tive tension between suppliers to reduce prices in the retail mar-
ket, instead of setting retail energy price limits. Besides, AER
also monitors and enforces compliance with obligations in the
retail law and rules, and administers a national retailer of the
last resort scheme, which protects customers and the market if
a retail business fails.
After four rounds of electricity market reform, full competi-
tion was introduced into the retail electricity market in United
Kingdom, with domestic and non-domestic consumers able to
shop around for their electricity suppliers [44]. However, more
than 70% of the electricity supply is still concentrated in the
hands of six largest suppliers, also referred to as “the big six”
[45]. The role of OFGEM in the retail electricity market mainly
includes four aspects: market monitoring, consumer protection,
metering, and information disclosure. To promote market com-
pliance, OFGEM monitors a wide range of information on the
retail market, including market indices, customer research, sup-
plier cost index, and typical domestic consumption values, and
others. OFGEM also controls the retail market access restric-
tions by setting the conditions on the supplier licenses, rang-
ing from consumer notification obligations to supplier switch-
ing processes, so as to protect the rights and interests of con-
sumers. For example, it is clearly stated in a supplier’s license
that customers should be notified at least 30 days in advance of
a supplier’s implementation of a rise in price, ensuring that cus-
tomers have enough time to switch suppliers without liability
after receiving the notification [46]. In spite of this, more than
half of U.K. households have never switched their suppliers, or
only switched once, and are on a more expensive “default” tar-
iff. In 2019, OFGEM introduced retail price caps to further pro-
tect those “less active” consumers from unfair price, and set the
level of price caps twice a year [47]. Additionally, OFGEM also
has regulatory functions in relation to metering, including regu-
lating the rollouts of advanced and smart metering, and certain
aspects concerning how network companies charge for meter-
ing services. Moreover, OFGEM annually updates a retail mar-
ket report, detailing commentary on recent trends in the retail
electricity markets to increase transparency.
The retail electricity market in France has been fully open
to competition since July 2007. Similar to other countries, the
sale of electricity is subject to governmental approval in France,
and all transactions performed on the French electricity mar-
ket must be monitored by CRE, regardless of ways of trad-
ing. According to the French Energy Code, there are currently
two pricing mechanisms in France, the regulated tariff and non-
regulated tariff. Consumers can choose to purchase electricity
from EDF at government-regulated prices, or from retailers
through bilateral negotiation. Since December 2015, the regu-
lated tariff has been limited to small and mainly domestic con-
sumers [32]. Additionally, in order to prevent ordinary users
from the inconvenience caused by marketization, Law NOME
requires that consumers with subscribed capacity less than 36
kVA be given an opportunity to sign a single contract deal-
ing with both the distribution and supply of electricity, which
should last at least for 1 year [39]. Since the electricity sector in
France is still dominated by EDF, CRE monitors vertically inte-
grated electricity companies (e.g. companies provide generation
and retail service, or distribution and retail service at the same
time) to strictly prohibit internal transactions.
Main aspects of retail electricity market regulation in the
United States, Australia, United Kingdom, and France are pre-
sented in Table 6.
3.3 Regulatory approach
In regulation practice, regulatory authorities adopt a variety
of policies and analytical tools to detect, deter, and deal with
market violations and anti-competitive conducts, ensuring the
compliance with the market laws and rules. When classifying
various regulatory approaches, a useful distinction is between
techniques that are applied ex-ante and those that are applied
ex-post.
Ex-ante regulatory approaches, such as market rule making,
market access restriction, market price cap setting, structural
market indices, and bid screening, mainly look for the poten-
tial of market violations. Market rule making and market access
restriction are common practices around the globe. However,
the market barrier is not easy to determine. On the one hand,
the market barrier needs to be sufficient low, so that new partic-
ipants could bring competitive tensions to the incumbents. On
the other hand, the market barrier needs to make sure all mar-
ket participants be well qualified so as to reduce the potential

32. XU ET AL. 159
TABLE
6
Main
aspects
of
retail
electricity
market
regulation
Country
Retail
marketization
Retail
access
conditions
Last
resort
supply
Credit
management
United
States
(Texas)
∙
Only
16
states
and
the
District
of
Columbia
open
to
retail
competition
∙
The
net
value
of
assets
of
the
retailer
should
not
be
less
than
100
million
USD
∙
The
last
resort
supplier
provides
transitional
power
supply
service
at
130–150%
of
the
monthly
wholesale
market
price
∙
Consumers
need
to
choose
another
retailer
eventually
∙
A
deposit
of
$500,000
is
required
Australia
∙
5/8
of
the
states
open
to
retail
competition
∙
Organizational
and
technical
capacity
∙
Financial
viability
and
capacity
∙
Business
and
risk
management
plan
∙
AER
administers
a
retailer
of
last
resort
scheme
∙
Price
cap
on
last
resort
service
∙
The
amount
of
deposit
is
related
to
the
credit
assessment
of
the
retailer
∙
The
minimum
of
the
deposit
should
not
be
less
than
the
electricity
purchasing
cost
in
a
month
United
Kingdom
∙
Fully
open
to
retail
competition
∙
OFGEM
controls
the
retail
market
barrier
by
setting
the
conditions
on
supplier
licenses
∙
Price
cap
on
last
resort
service
∙
Last
resort
suppliers
can
apply
for
the
compensation
if
the
electricity
fee
cannot
cover
their
cost
∙
Deposit
is
required
when
applying
for
a
supply
licence
France
∙
Fully
open
to
retail
competition
∙
Technical
capacity
∙
Business
plan
∙
EDF
serves
as
the
last
resort
supplier
∙
Regulated
tariff
of
the
last
resort
service
applies
∙
The
minimum
of
the
deposit
should
not
be
less
than
the
electricity
purchasing
cost
in
a
month
risk. International experience also shows that structural market
indices, such as the Herfindahl–Hirschman Index (HHI), mar-
ket share, pivotal supplier indicator, and residual supply index,
perform well in pre-warning market risks. The PJM and CAISO
electricity markets in the United States adopt the TPS test as an
ex-ante screening approach to prevent the exercise of market
power and ensure competitive pricing [28]. If a market partici-
pant fails in the TPS test, its offer would be set to the lower of
its price-based or cost-based offer. Besides, the Australian NEM
adopts a market price cap of AUS$15,000/MWh and a cumula-
tive price threshold of AUS$221,100, which caps the total mar-
ket price that can occur over seven consecutive days, to protect
market from both extreme price fluctuations and sustained high
prices [48]. Compared with the audit, investigation, and other
ex-post regulatory approaches, ex-ante regulatory approaches
have lower cost and higher transparency, and are therefore pre-
ferred by market participants.
After the market operation day, more market data can be
acquired and the market performance can be analysed, pro-
viding the regulatory body with more specific measures and
evidences of market violations. Ex-post regulatory approaches
include market data analysis, company self-report, audit, and
investigation. Currently, the United States and Australia both
adopt the “Structure-Conduct-Performance (SCP)” framework
based on the industrial organization theory for electricity market
monitoring and analysis, which analyses the market from three
aspects: market structure, market conduct, and market perfor-
mance. Based on the SCP framework, a series of practical mar-
ket monitoring indices are developed, including ex-ante and ex-
post indices, as shown in Table 7 [49–51].
When gathering information of possible market violations,
self-reporting is encouraged by regulators to promote internal
regulation. In many cases, self-reported market violations result
in closure of the matter without sanctions, and in the cases that
do not, the penalties would also reflect mitigation credit for
the self-reporting that substantially lowered the amount [35].
In addition, audits are also widely used as a basic way to iden-
tify market violations and manipulations. Generally, an audit
can be initiated without any information or allegation regard-
ing any specific wrongdoing. The discovery techniques used in
an audit typically consist of on-site interviews, conference calls,
document reviews, transactional testing, and data requests. In
contrast to audits, investigations are usually initiated only when
there are reasons to suspect violations, or when the investiga-
tion staff received information from self-reporting, internal or
external market monitors, or other sources. The necessity of
the investigation needs to be evaluated by the investigation staff
and officially notified to the investigated company, followed by a
complex procedure. In the United States, the initiation of inves-
tigations and all related information in the process are non-
public, unless there are orders of disclosure from FERC [52].
Once market violations are identified, regulatory authori-
ties may take enforcement actions to penalize offending con-
ducts and ensure future compliance with the law. Typical
enforcement actions include disgorgement, imposition of com-
pliance plans, license revoking, civil penalties, and criminal
prosecution, and others. International experience shows that

33. 160 XU ET AL.
TABLE
7
Analytical
indices
for
electricity
market
monitoring
based
on
the
SCP
framework
Category
Indices
Motivations
Calculation
methods
Market
structure
Ex-ante
Market
share
∙
Easy
to
understand
∙
Theoretical
justification
under
certain
assumptions
∙
Simplest
versions
only
require
sales
or
capacity
data
S
i
=
G
i
∕
∑
N
i=1
G
i
×
100%
S
i
—
the
market
share
of
supplier
i;
G
i
—
the
generation
capacity
of
supplier
i;
N
—
the
number
of
suppliers
in
the
market.
Herfindahl–Hirschman
Index
HHI
=
∑
N
i=1
S
2
i
HHI
—
the
Herfindahl-Hirschman
Index
of
the
market.
Supply
demand
ratio
∙
Taking
demand-side
conditions
into
account
∙
Measuring
the
degree
to
which
the
supply
from
suppliers
is
required
in
order
to
meet
the
demand
in
the
market;
∙
Applicable
at
a
local
market
level
as
well
as
the
system
level
∙
Some
empirical
support
∙
Capable
of
tracking
dynamically
changing
markets
𝛾
=
∑
N
i=1
P
i
∕D
γ
—
the
supply
demand
ratio
of
the
market;
P
i
—
the
supply
from
supplier
i;
D
—
the
total
demand
of
the
market.
Three
pivotal
suppliers
test
RSI
3
i
=
(
∑
N
i=1
P
i
−
∑
2
j
=1
P
l
arg
est
j
−
P
i
)∕D
RSI3
i
—
the
TPS
test
score
of
supplier
i;
Plargest
j
—
the
supply
from
two
largest
suppliers.
Ex-ante/ex-post
Pivotal
supplier
index
(must-run
ratio)
MRR
i
=
(D
−
P
in
−
∑
N
i=1
P
i
+
P
i
)∕P
i
MRR
i
—
the
must-run
ratio
of
company
i;
P
in
—
the
power
import
limit
of
the
area.
Residual
supply
index
RS
I
i
=
(
∑
N
i=1
P
i
−
P
i
)∕D
RSI
i
—
the
residual
supply
index
of
supplier
i.
Ex-post
Residual
demand
analysis
∙
Taking
elasticities
of
supply
and
demand
into
account
∙
Theoretical
justification
(link
to
the
Lerner
index)
Examining
the
residual
demand
curve
faced
by
a
supplier;
The
inverse
of
the
residual
demand
elasticity
is
equal
to
the
Lerner
index.
Market
conduct
Ex-ante/ex-post
Bid-cost
margins
(Lerner
index,
price–cost
margin
index)
∙
Easy
to
understand
∙
No
need
to
define
a
geographic
market
∙
Useful
metric
for
ex-ante
theoretical
models
as
well
as
ex-post
empirical
analysis
LI
i
=
(p
−
MC
i
)∕p
PCM
I
i
=
(p
−
MC
i
)∕MC
i
LI
i
—
the
Lerner
index
of
supplier
i;
PCMI
i
—
the
price-cost
margin
index
of
supplier
i;
p
—
the
market
price.
Ex-post
Net
revenue
benchmark
analysis
∙
Estimating
the
extra
earning
of
the
market
participants
from
market
price
increase
∙
Focusing
on
investment
incentives
and
entry/exit
issues
∙
Relevant
for
long-term
analyses
Measured
by
the
comparison
of
the
expected
revenues
and
the
estimates
of
costs
of
a
particular
supplier.
Withholding
analysis
∙
Representing
the
most
basic
strategy
of
exercising
market
power
∙
Estimating
whether
a
market
participant
limits
the
volume
of
electricity
energy
available
on
the
market
in
order
to
trigger
a
price
increase
∙
Correlation
analysis
can
trigger
further
analysis
without
preliminary
auditing
P
gap
i
=
P
econ
i
−
P
actual
i
P
gap
i
—
the
output
gap
of
supplier
i;
P
econ
i
—
the
economic
output
level
of
supplier
i;
P
actual
i
—
the
actual
output
level
of
supplier
i.
(Continues)

34. XU ET AL. 161
TABLE
7
(Continued)
Category
Indices
Motivations
Calculation
methods
Bid
screening
∙
Estimating
whether
a
market
participant
employs
a
strategy
based
on
high-pricing.
Measured
by
the
comparison
between
the
bid
price
and
reference
price,
which
is
estimated
by
historical
bids,
nodal
price
and
cost,
of
a
particular
supplier.
Market
performance
Ex-post
Market
liquidity
∙
Identifying
market
inefficiencies
and
the
potential
of
market
power
abuses;
∙
Convergent
with
the
methods
applied
to
market
power
monitoring
and
behavioural
monitoring.
Measured
by
the
volume
of
trade
in
a
market;
Indicated
by
the
number
of
suppliers
in
the
market,
and
in
particular
the
number
of
traders
that
do
not
have
physical
positions.
Spot
market
exposure
Measured
by
the
percentage
of
the
power
bought
under
long
term
forward
contracts
over
the
one
attained
not
by
a
market
mechanism.
Market
price
analysis
∙
Trend
analysis
of
prices
can
reveal
patterns
which
might
be
hidden
by
day-to-day
volatility.
∙
Frequency
of
price
hitting
the
market
price
cap
is
an
indicator
of
how
price
might
change
if
the
cap
is
adjusted
or
removed.
Moving
averages
or
other
trend
analysis;
Volatility
measures
(average,
variance,
min–max
prices);
The
identity
of
the
price-setting
unit.
Competitive
benchmark
analysis
∙
Taking
account
of
the
entire
market
in
a
refined
version
of
price-cost
margin
analysis;
∙
Capable
of
providing
quantitative
estimate
of
efficiency
and
welfare
loss
by
market
power
abuse.
Estimate
the
market
price
that
would
result
if
all
suppliers
behave
as
price-takers;
Estimate
the
marginal
cost
of
production
of
the
marginal
supplier
by
simulating
a
hypothetical
competitive
market.
Congestion
analysis
(transmission
congestion
index)
∙
Taking
transmission
capacity
constraints
into
account,
which
represent
an
important
issue
in
market
power
monitoring
and
are
often
overlooked.
TCI
=
C
congestion
∕Q
system
TCI
—
the
transmission
congestion
index
in
a
given
period;
C
congestion
—
the
total
transmission
congestion
cost
in
a
given
period;
Q
system
—
the
total
system
electricity
energy
in
a
given
period.

35. 162 XU ET AL.
voluntary future compliance is preferred to resolve minor
infractions, rather than penalties. For example, as noted in the
staff report of FERC, between 2005 and 2007, enforcement
staff closed approximately 75% of FERC’s investigations with-
out any sanctions being imposed, even though violations are
found in about half of those closed investigations [53]. Addi-
tionally, more than half of self-reports submitted to staff were
closed with no action. In United Kingdom, OFGEM may take
alternative actions to bring a company into compliance when
potential breaches are not serious [54]. The alternative actions,
such as agreements on a period of reporting, non-statutory
undertakings or assurances, independent audit, can be used in
lieu of opening an investigation into a potential breach, or as
part of closing an investigation. Besides, information disclosure
is one of the key points of electricity market regulation in inter-
national practices. Regulatory authorities publish market reports
and enforcement matters reports on a regular basis, together
with the media broadcast; this would directly impact the stock
prices and public images of generation companies, which are
crucial to their operation [55]. Therefore, information disclo-
sure performs well in enforcing compliance with rules in regu-
lation practices of electricity markets around the globe.
3.4 Summary
The contents of electricity market regulations in four developed
countries are detailed in Section 3, and are summarized as fol-
lows. First, while being similar in some common initiatives, like
market access barriers, market monitoring and reporting, regu-
lations of wholesale electricity markets in four developed coun-
tries are marked by a series of deep disparities due to differences
among various wholesale electricity market mechanisms. Essen-
tially, the wholesale electricity market regulation is highly con-
nected with the market mechanism concerned, which greatly
lies on the generation mix of the region. Therefore, it is hard
to develop a generally applicable regulation system for various
wholesale electricity markets. Certainly, the degree of market
competition can be adjusted through a regulatory method, to
better fit the innate generation resource of the region.
Secondly, the evolvements of retail electricity market liberal-
ization are at different levels in different countries and states,
and the variations of regulation priorities and pricing schemes
are then manifested. In those regions with fully opened retail
competition, the qualification of electricity retailers is under
strict review to make sure that they meet specified technical and
financial requirements. Credit assessment and deposit are also
required to control the risk of retailer failure. During the mar-
ket operation, information disclosure has become an effective
way to promote competition among electricity retailers so as to
benefit consumers. For those consumers who do not want to
engage in a market competition, the regulations on electricity
retailers concerning the last resort scheme and selectable regu-
lated price schemes are taken seriously to protect their interests
from unreasonable prices.
Thirdly, with the development of the theoretical basis of
electricity market regulation, many regulatory approaches and
market indices are proposed, and more market conditions are
taken into account in regulation practices. Besides, the way
of information gathering has been greatly widened but self-
reporting and voluntary compliance are still most encouraged
to reduce the cost of regulation. When taking enforcements
to penalize market violations, the self-reporting and voluntary
alternative actions would reflect in a reduction of penalty.
4 DEVELOPMENT TRENDS IN
ELECTRICITY MARKET REGULATION
Generally, electricity market regulation needs to keep pace with
the evolvement of the market mechanism, which is ultimately
reflected by energy transition and the change of generation mix
in the country concerned. Market regulation can be used, to
some extent, to guide the direction of market development.
In recent years, climate change, emission reduction, renewable
energy generation development, and power supply reliability
have become common concerns in developed countries with
mature electricity markets, and a number of energy policies have
been proposed to cope with the global energy shortage and
ever-increasing emission of greenhouse gases.
4.1 Climate change and emission reduction
targets
The global energy consumption in 2018 increased at nearly
twice the average rate of growth since 2010, and thereby an
annual average rise of CO2 emission of 1.7% was observed [56].
As global concerns for climate change increase, governments
in some countries have set up emission reduction targets for
their energy industries in order to limit rising global tempera-
ture and reduce man-made CO2 emission. However, since the
United States announced its withdrawal from the Paris Agree-
ment in 2017, further efforts on emission reduction at the fed-
eral level came to a standstill, and states in the United States are
expected to lead the way on renewable energy use and emission
reduction by responding with their own policies. Many states
have implemented legally binding carbon pricing mechanisms,
and are pursuing decarbonisation targets for 2030 and beyond
by supporting zero-carbon technologies through a wide range of
regulatory and market-based instruments. In Australia, the gov-
ernment aims for 23.5% (equivalent to 33,000 GWh) of electric-
ity to be generated by renewable sources by 2020. Meanwhile, a
number of large coal-fired power stations have been closed or
announced to be closed in Australia, including the closure of the
546 MW Northern power station in 2016, and the closure of the
1760 MW Hazelwood power station in early 2017; the 2000 MW
Liddell power station is expected to be closed in 2022 [43].
In European Union, Directive 2009/28/EC on the promotion
of renewable energy and biofuel generation sets out EU-wide
targets that at least 20% of the EU’s overall energy consump-
tion (electricity, heat, and transport fuels) come from renewable
sources by 2020. The EU target for renewables is broken down
into individual national targets. Accordingly, United Kingdom is

36. XU ET AL. 163
TABLE 8 The decarbonisation targets in four developed countries
Country Emission reduction target Target year
United States Greenhouse gas (GHG) emissions reduction targets: 26% to 28% (below 2005 levels) 2025
Australia GHG emissions reduction targets: 26–28% (below 2005 levels) by 2030, and 5% by 2020 (below 2000 levels) 2020/2030
Renewable energy target: 23.5% (equivalent to 33,000 GWh) of electricity to be generated by renewable sources 2020
United Kingdom GHG emissions reduction targets: 34% by 2020, and 80% by 2050 (below 1990 levels) 2020/2050
Renewable energy target: 15% of its energy consumption from renewable sources 2020
France GHG emissions reduction targets: reduction of GHG emissions by 40% 2030
Renewable energy target: 32% of renewable energies in the end energy consumption, and 40% of total electricity
generation
2030
required to ensure 15% of its overall energy consumption from
renewable sources by 2020. In France, the bill on climate and
energy is currently being discussed and debated before the two
chambers of the French parliament, with an objective of reduc-
ing pollution by capping CO2 emission for coal-fired power
plants, as a result four remaining coal-fired power plants have
to be closed by 2022 [21].
Emission reduction targets and renewable energy accommo-
dation targets of the developed countries mentioned above are
shown in Table 8.
To counter the problems above, some recommendations are
proposed: (i) accelerating efforts to develop and deploy car-
bon capture and storage (CCS) technologies; (ii) promoting
the use of electric vehicles and development of an accessible
national/regional charging network; (iii) guiding energy transi-
tion with an emission reduction target and related mechanisms
to provide a market signal for older and less efficient power
plants to retire and a stable outlook for long-term investment
in efficient energy technologies.
4.2 Integration of renewable energy
generation in the electricity market
Driven by reduced costs and policy supports, renewable energy
generation technology has advanced significantly over the last
decade. Integrating a high share of intermittent renewable
energy generation, such as wind and solar power generation, in
an electric power system and an electricity market is essential
for transition to a less carbon-intensive and more sustainable
energy system. However, the variability, uncertainty, intermit-
tency, and location-dependence of renewable energy generation
often cause extra operational costs in the concerned power
system to accommodate renewable generation, and hence it
is difficult for renewable energy generators to directly partici-
pate in electricity market competition. Ideally, a well-designed
electricity market can help integrate renewables and drive tech-
nological innovation, but the existing electricity market rules
are largely tailored to traditional power plants. The prevailing
supporting schemes, such as the dispatch priority and feed-in-
tariff (FiT), typically create market distortions and ignore the
negative impacts on system operation. Therefore, market-based
supporting policies and financial mechanisms that expose
renewables to market price signals are adopted by regulatory
bodies to comprehensively correct systemic lag between elec-
tricity market operation and ever-increasing penetration of
renewable generation.
In the United States, the prevailing policy tool at the fed-
eral level for incentivizing the accommodation of renewable
energy generation is the so-called federal tax credits, including
production tax credit and investment tax credit [41], which can
be used to offset income tax obligations for households and
companies. At the state level, the renewable portfolio standards
(RPS) are widely adopted, requiring retail electricity providers
to source a certain share of supply from qualified renewable
sources [57]. Though the RPS policy is not in place at the
federal level, but is adopted by 29 states and the District of
Columbia (voluntary targets are employed in eight states), and
acts as an important driver of renewable energy technology
deployment in the United States. In addition to RPS, many U.S.
states have adopted the net metering mechanism, which permits
residential and commercial end users with their own renewable
power generation to sell surplus electricity back to the power
grid.
In Australia, renewable energy generation in the electricity
sector is supported by policies at both commonwealth and state
levels. The quota system, similar as the RPS in the United States,
serves as the incentive for renewable energy generation at the
commonwealth level, sets a minimum medium-term target for
renewable energy generation; this target is expected to attain via
the established tradable certificates. The certificates are issued
for each eligible MWh of electricity produced by an accredited
renewable power generator, and can be sold to obligated entities
who have to surrender their certificates annually to the Clean
Energy Regulator so as to demonstrate their compliance with
the annual renewable energy targets. State and territory policies
aim to reach targets which may or may not be aligned with the
commonwealth targets and policies. Most Australian states have
FiT schemes, which provide owners of small renewable energy
systems with guaranteed fixed rates for the sale of electricity fed
into the power grid. However, a nationally mandated FiT mech-
anism is not available.
Similar financial mechanisms supporting renewable energy
generation are adopted in United Kingdom as well, known
as the renewable obligation (RO), introduced in 2002, placing
an obligation on electricity suppliers to source an increasing

37. 164 XU ET AL.
TABLE 9 Supporting policies of renewable energy generation in four
developed countries
Country Supporting Policy
United States Federal tax credits (production tax credit and
investment tax credit)
Renewable portfolio standards (state)
Net metering (state)
Australia Quota scheme (commonwealth)
State auctions (state)
Feed-in-tariff (state)
United Kingdom Renewables obligation (being replaced)
Feed-in-tariff
Contract-for-difference (main mechanism)
France Feed-in-tariff
Market premium
proportion of electricity from renewables. However, the RO
scheme is recently being replaced by the contract for differ-
ence (CfD) scheme, which is now the main mechanism of sup-
porting new large-scale renewable energy generation projects.
CfDs are long-term contracts which could be used between
a government-owned counterparty and low carbon generators
such as renewables, nuclear, and carbon capture and storage
(CCS) equipped plants. Generation companies holding CfDs
are guaranteed a certain selling price throughout the contract
mechanism, hence the income predictability can be improved,
and the capital cost of a new renewable energy project reduced.
CfD payments are raised through a levy on all electricity suppli-
ers in United Kingdom, who pass these costs on to consumers.
In this way, the additional cost of renewable electricity is spread
over the entire electricity market.
The French government encourages the development of
renewable energy generation through two schemes: the FiT
and the market premium. Under the FiT scheme, all electric-
ity generated by renewable energy is bought by EDF, who is
compelled to do so due to a public service obligation, at a
price over the market price. The price premium will further
be passed to final electricity consumers. Since the enforcement
of the Energy Transition Act from 17 August 2015, FiT con-
tracts have become exceptional, and the present main support
mechanism is the market premium [58]. The monthly or annual
market premium, depending on technology, is calculated as the
difference between the reference value of technology and aver-
age revenues of all installations of the same technology from the
French energy and capacity markets, augmented by a manage-
ment premium covering the cost of market access. As a result,
the market premium allows generators to receive market signals,
and generators who meet the market needs better earn higher
revenues.
Traditional supporting schemes for renewable energy gener-
ation are gradually replaced by more market-compatible ones,
in order to minimize market distortions. Supporting policies of
renewable energy generation in the four developed countries are
summarized in Table 9.
To counter the problems above, some recommendations are
proposed: (i) refining ancillary service markets and extending
the scope of ancillary services to ensure system security, espe-
cially during periods of high wind and photovoltaic generation;
(ii) ensuring timely decisions on renewable energy generation
support schemes to address the need for transparency, long-
term predictability, and certainty to gain investors’ confidence;
(iii) expanding opportunities for renewable energy in heating
and cooling, industry, and transportation.
4.3 Security and adequacy of power supply
Facing with rising extreme weather events, a growing share
of renewable energy generation, and retirements of old coal-
fired and nuclear power plants, many countries are seeking
their ways to ensure the security and adequacy of power
supply.
In the United States, the growth of natural gas and renew-
ables at the expense of coal and nuclear generation is raising
new concerns about potential impacts on power system reliabil-
ity and resilience. A federal proposal was submitted by DOE in
September 2017, urging FERC to develop cost recovery mech-
anisms for baseload power plants, such as coal-fired and nuclear
power plants. The proposal also called for compensation mech-
anisms for baseload power plants that have 90 days of fuel sup-
ply on-site. However, in January 2018, an order issued by FERC
terminated the proceeding to address the proposed rule and
initiated a new proceeding to evaluate the resilience of a bulk
power system in the footprints of the RTOs and ISOs, which
remains pending. At the state level, capacity markets are adopted
in electricity markets where the RTO/ISO is responsible for
resource adequacy (i.e. ISO-NE, PJM, and NYISO), to ensure
adequate supply reserves. Capacity markets seek to ensure ade-
quate generation capacity reserves in the near future, from 1
month (MISO) to 3 years (PJM and ISO-NE), in a market-
based way. In electricity markets that do not operate a capacity
market, like ERCOT, a scarcity pricing mechanism is adopted,
which permits extreme high price during periods of tight supply
and hence significantly increases payments to generators, pro-
viding incentives for both generation investment and active par-
ticipation by demand bidding [59]. Scarcity price can be adjusted
either by bids and offers of market participants, or by the oper-
ating reserve demand curve set by market operators or reg-
ulators [15]. Besides, in 2018, NERC, who is responsible for
conducting assessments and reporting on the overall reliability
and adequacy of the power system, started a 2-year special reli-
ability assessment of risks facing the electric power system due
to a changing generation mix.
In Australia, electric power system security and reliability
have received considerable public and political attention since a
state-wide blackout in South Australia in 2016 and the load dis-
connections during a country-wide heat wave in 2017 happened.
Government and regulatory authorities are currently focusing
on ensuring continued energy security and reliability in light
of refurbishment of ageing infrastructure, rising peak demand
and stronger participation of renewable energy resources. For
instance, to avoid electricity price increase following unexpected
generator closures, AEMC implemented a rule change requiring

38. XU ET AL. 165
large generators to notice the market operator at least 3 years
before closing [9]. However, the electricity market is still facing
considerable uncertainty about future policy, particularly around
emissions reduction from the power sector after 2020, which
has increased risk premiums for investments of new generat-
ing facilities and made capital-intensive projects less attractive.
To attract new investments for ensuring the implementation of
the emissions reduction target and power system reliability, a
scarcity pricing mechanism is also adopted in Australia. Mean-
while, in order to prevent generators from gaining extra rev-
enue, their bids are capped at $300/MWh when the frequency
of scarcity price exceeds a certain threshold. Additionally, the
retailer reliability obligation (RRO), commenced on 1 July 2019,
supports power system reliability in the NEM by incentiviz-
ing retailers and large energy users to contract or invest in dis-
patchable and “on demand” resources. The RRO will be trig-
gered when AEMO identifies a potential reliability gap in NEM
regions 3 years and 3 months out of 5 years, then liable enti-
ties are on notice to enter into sufficient qualifying contracts to
cover their shares of a peak demand [60].
In United Kingdom, about 21% of the existing generation
capacity is due to close in the next decade as a result of the
scheduled decommissioning and European environmental reg-
ulations [61]. Since the electricity capacity margin is tightening,
power system security has been a priority for the government.
To manage the low margin, OFGEM approved the supplemen-
tal balancing reserve (SBR) and demand side balancing reserve
(DSBR) in 2013 as extra tools for the National Grid company
to help balance the supply and demand in the power system
in case of need. SBR and DSBR allow the National Grid com-
pany to contract with generators and other balancing service
providers to provide additional balancing services outside the
normal operation of the market, which could effectively reduce
risks to the security of electricity supply. Moreover, United
Kingdom’s first capacity market auction was held in December
2014, with all types of capacity able to participate (except for
capacity providers already in receipt of support from other
policy measures, such as renewable energy generation). The
main objective of the capacity market is to ensure adequacy of
electricity supply and close the anticipated supply gap resulted
from large-scale retirements of old coal-fired and nuclear power
plants.
On 31 January 2020, United Kingdom formally left the Euro-
pean Union (a process known as “Brexit”), and started an 11-
month transition period. During the period, the electricity mar-
ket in United Kingdom remains coupled with those of the EU,
with relevant EU legislations governing their operation. The
U.K. government is working to reach a free trade agreement
with the EU, which will come into effect following the transi-
tion period. If the free trade agreement negotiation fails, energy
suppliers in United Kingdom may have to pay huge taxes for
the cross-border electricity transmission. Besides, the impacts of
Brexit on the energy market and the rules applicable in United
Kingdom may undermine investments on cross-border trans-
mission networks and open trades.
The French electricity generation mix has a low diversity and
high baseload thanks to the dominance of nuclear power (78%)
and hydropower (10%) in the mix [32]. Despite having a largely
decarbonized power generation, there are a number of wor-
ries related to power system adequacy, such as ageing nuclear
power plants with requirements for shut-downs, lower water
availability in dry years, reduced flexibility from thermal power
plants following the closure of oil- and coal-fired power plants,
and decreasing peak-demand response capacity in recent years.
These impacts are only partially offset by increasing shares of
variable renewable generation. To address this situation, a capac-
ity obligation mechanism is proposed, requiring suppliers to
obtain sufficient capacity guarantees to cover the consumption
of all of their customers during peak demand periods. Subse-
quently, a capacity guarantees market is established and started
in December 2016, to provide market participants incentives
of developing demand side management capacity [62], which
is helpful to reverse the decline in demand response capacity.
Capacity guarantees can be obtained by investing in generat-
ing facilities or demand side response capacities, or by acquir-
ing them from other generation companies or demand side
response providers.
To counter the problems above, some recommendations
are proposed: (i) requiring power plants to provide required
advance notice of their intention to close; (ii) developing work-
able generation capacity adequacy mechanisms to address the
need of stranded cost recovery for new generation entries; (iii)
providing market operators with more power to intervene in
the market more timely so as to ensure system security in case
of need.
5 PROSPECT IN ELECTRICITY
MARKET REGULATION IN CHINA
5.1 Progress of electricity market reform in
China
As one of the largest economies in the world, China is deeply
embedded in the global energy value chain. Consequently, the
electricity market reform in China has received considerable
global attentions. In 2015, the State Council of China issued
“The Opinions regarding Further Reform of the Electric Power
Regime (The Opinion)” and related supporting documents,
covering almost every detail of the electricity sector, and initi-
ated a new round of electricity market reform in China [63]. Up
to 2017, a great progress had been made with transmission tar-
iffs of all provinces examined, the medium and long-term elec-
tricity market liberalized, and electricity prices reduced. How-
ever, without the spot market and real-time pricing mechanism,
the real-time value of the electricity is not properly revealed,
and demand response not well motivated. Besides, the reduc-
tion of electricity price was largely owing to excess generating
capacity and administrative intervention. Generally, the electric-
ity market in China is far from competitive and efficient, which
has already been noticed by the Chinese government. In 2017,
eight provinces in China, including Guangdong and Zhejiang,
pioneered the establishment of electricity spot markets. With
eight electricity spot markets entering into trial operations in

39. 166 XU ET AL.
2019, China is undergoing a critical period of electricity market
reform.
During the electricity market reform, electricity market
regulation needs to keep pace with the market evolvement.
New requirements have been put forward in The Opinion and
its supporting documents, such as improving electric power
industry regulatory framework, innovating regulatory strategy,
promoting electricity market competition. Compared with
developed countries, electricity market regulation in China is
also facing a number of peculiar Chinese challenges. First, China
is a developing country with a steady economic growth. Stable
and adequate energy supply is the foundation of economic
development, hence the security and adequacy of the electric
power system are the top priorities that the regulatory body
needs to address, and radical market reform strategies would
not be adopted for the sake of economic stability. Secondly,
during the transition period to marketization, both market
competition and national monopoly exist in the electric power
industry at the same time, bringing more restrictions on the
market mechanism design and market regulation. Thirdly, since
the electricity supply and electricity market establishment are
mainly administered at the province level, electricity market
designs can be different among various provinces, and hence
electricity market regulation needs to be customized as well.
Finally, the electric power industry in China involves a great
number of stakeholders, including governmental authorities
that used to heavily regulate the energy sector, dominant
state-owned enterprises, and private companies that are trying
to catch up the market opportunities, presenting additional
obstacles to the electricity market regulation in China.
5.2 Status and drawbacks of electricity
market regulation in China
5.2.1 Regulatory authority
The Opinion and its supporting documents detailed the func-
tions of regulatory authorities in China. The National Devel-
opment and Reform Commission (NDRC) and the National
Energy Administration (NEA) are in charge of the electricity
market reform in China. The NEA, along with provincial gov-
ernments, take the responsibility of electricity market regula-
tion in provinces, including market power control, anti-market
manipulation, promoting market efficiency, and ensuring a non-
discriminatory access to electricity transmission networks. Since
both NDRC and NEA are governmental bodies, the electric
power industry regulatory functions in China are fully inte-
grated into the government. In the short term, such a regula-
tory framework can streamline the regulatory institutions; this
is in line with the features of the power industry restructuring
in China and is helpful for achieving the consistency among
various energy policies. However, the electricity market regu-
lation heavily relies on the government under such a regula-
tory framework, which not only increases the workload of the
government, but also leads to the absence of social supervision
over the electric power industry. The absence of a third-party
TABLE 10 Allocations of electric power industry regulatory functions in
China
Institution Function
NDRC ∙ Top-level design
∙ Electric power regime reform
∙ Electricity price control
∙ Energy policy proposing and energy
project approving
NRA ∙ Industry standards setting
∙ Market rule setting
∙ Cross-region transaction monitoring
∙ Transmission network planning
∙ Generation facility siting
∙ Nuclear emergency administration
State-Owned Assets
Supervision and
Administration
Commission
∙ State-owned assets management
∙ Appointment and assessment of staff
members in state-owned enterprises
∙ Internal regulation management of
state-owned enterprises
Ministry of Finance ∙ Financial standards setting for
generation companies
∙ Fund management for investments
∙ Supervision on the financial status of
state-owned enterprises
Ministry of Ecology and
Environment
∙ Emission regulation
∙ Environmental impact assessment of
energy projects
The Quality and Technology
Supervision Bureau
∙ Quality control and technical standards
setting in electric power industry
regulation may result in the excessive reliance on administra-
tive orders or approvals in the regulation practices, and rule-
based regulation is hard to implement; this is likely to reduce
the transparency of regulation, and undermines restrictions on
regulatory power, which would make the regulatory system out-
grown and outmanoeuvred by the institutions and markets it
was responsible for regulating and constraining in the long
run.
5.2.2 Allocation of regulatory functions
The electric power industry regulatory framework in China is
based on the collaboration among various governmental bodies,
including NDRC and NEA, as detailed in Table 10.
Inappropriate allocations of regulatory functions are likely to
cause conflicts among regulatory bodies. As detailed in Table 10,
the regulatory functions of the electric power industry are allo-
cated among a number of governmental bodies, and quite com-
plex issues can be involved. When facing with complicated
tasks that call for cooperation among regulatory bodies, the
process of enforcement would be problematic and may bring
considerable coordination costs. Moreover, the involvement of
too many regulatory bodies is likely to cause duplication or
absence in some aspects of the regulation. For instance, the
economic regulation conducted by NEA may be overlapped or

40. XU ET AL. 167
conflicting with the state-owned assets regulation enforced by
State-owned Assets Supervision and Administration Commis-
sion. The overlap or absence of regulatory functions may result
in buck-passing or low efficiency in regulation practices. In addi-
tion, the vested interest of various regulatory authorities is also
one of the obstacles to the market competition and market
reform.
5.2.3 Laws and regulations
The laws and regulations for electricity market regulation in
China are imperfect. In international practices, the establish-
ment and functions of an electric power industry regulatory
authority are granted by the laws promulgated by national leg-
islative bodies, such as the Federal Power Act of America and
the Electricity Act of United Kingdom. However, the prevail-
ing Electric Power Law in China does not clarify the scope of
functions of regulatory authorities, making the law less applica-
ble. The Electric Power Regulations, as the top administrative
electricity market regulations in China, were released in 2005,
and only issues related to the unilateral electricity market in the
previous round of electricity market reform are covered [64].
Facing with new market participants (e.g. power exchanges, elec-
tricity retailers), the scope of the regulations needs to be revised
to meet the need of the electricity spot market regulation.
Without legislative authorizations on the regulatory power, it is
difficult to guarantee the independence and authority of the reg-
ulators. Improvements have been made since 2015, with NEA’s
release of “Letter on Soliciting Opinions on the Implemen-
tation of Electricity Market Regulations (Trial)”, which covers
issues related to electricity spot market competition, so as to
enhance the independence of the market regulator. Moreover,
the abuse of market power is not covered in the existing leg-
islative framework in China, making it almost impossible to
hinder dominant generation companies from executing market
power.
5.2.4 Regulatory approaches
The electric power industry in China is undergoing a transition
to the marketization, but most of regulations and regulatory
approaches remain only suitable for the traditional vertical inte-
grated electric power industry, with the priority on medium and
long-term electricity transactions. However, after the introduc-
tion of spot market competition, more electric power will be
traded by market competition either through centralized auc-
tions or bilateral trading. Compared with conventional regula-
tory approaches, such as on-site inspection, document review,
or administrative order, the marketization requires a change of
the regulatory approach from the administrative management to
a rule-based regulation, making regulating activities supplemen-
tary to the market rules. The market independence and mar-
ket transparency should be protected and regulatory approaches
need to be more advanced, preventive, and off-site.
5.3 Prospects of electricity market
regulation in China
5.3.1 Revising the allocation of regulatory
functions
During the new round of the electric power regime reform in
China, it is vital to learn from international experience in the
allocation of regulatory functions, remove the overlap and/or
identify the absence of regulation, and achieve the consistency
of economic regulation and social responsibility regulation in
the electric power industry. After the electricity market is fully
developed in the future, an independent third-party regulator
should be introduced into the regulatory system as a supple-
mentary to the government regulation. Meanwhile, there is an
urgent need to revise the Electric Power Law or release new
laws related to electricity market regulation, so as to establish
a comprehensive legislative framework covering market partic-
ipants, market operators, power exchanges and regulators, so
as to provide legal guarantees on the authority and function of
regulators.
5.3.2 Setting regulations suitable for the
electricity spot market competition in China
The ever-increasing demand for electric power, coupled with
the coexistence of market competition and national monopoly,
makes the electricity market regulation in China quite different
from that in developed countries. In the long term, incentives on
investments and generation efficiency should be considered to
ensure a sustainable development of the electric power industry.
In the short term, regulations need to be compatible with the
process of economic and social development in China, as well
as the process of electricity market evolvement, so as to achieve
a smooth transition to the electricity spot market. Compared
with the traditional electric power industry regulation, market
regulation needs to minimize the intervention of administra-
tive orders and address issues in a market-based way as much
as possible. The focus of the regulation should be shifted on
areas prone to market failures, such as market power abuse, anti-
market manipulation, and excessive emission. Due to the domi-
nance of the five generation group companies in China, market
rules for mitigating potential market power abuse need to be
developed before corresponding laws and regulations come into
being. Additionally, targeted market regulation needs to be car-
ried out according to the market designs in different provinces
of China, with customized market rules and standards set to
improve the effectiveness of electricity market regulation.
5.3.3 Credit management
The ever-increasing number of market participants, increasing
frequency of electricity transactions, as well as imperfect mar-
ket rules, have exposed market operators and participants to a

41. 168 XU ET AL.
high level of financial risks, making the credit management even
more urgent in the market environment. An effective credit
management mechanism can promote market rule compliance,
reduce the cost of regulation, and contribute to successful elec-
tricity market reform. As required by The Opinion, a credit
rating mechanism will be established to assess and record the
credit of each market participant regarding the participation in
the market and compliance with market rules. A unified national
credit management system should be built to log market vio-
lations and related individuals, so as to provide evidences for
credit rating and market access restrictions.
5.3.4 Developing practical regulatory
instruments
With the evolution of electricity market reform in China, the
scope of market regulation has been gradually expanded, and
the difficulty associated increased as well. Since the commonly
used on-site investigation in the regulation practice cannot meet
the requirement of real-time regulation in the electricity spot
market, the lack of regulatory technology and regulatory instru-
ments has become a critical issue for regulators to address. It is
necessary to develop practical regulatory instruments that cover
the entire cycle of market operation. Ex-ante tools, like mar-
ket indices setting, structural market power detection, and mar-
ket access restriction, can prevent the potential market violation
to some extent. Real-time market monitoring can identify mar-
ket anomalies, and proper actions can be taken to remedy the
market violations. Ex-post tools, such as information disclosure
and net revenue benchmark analysis, look for the actual exer-
cise of market violations, provide regulators with specific evi-
dences to take enforcement actions, and hence promote future
compliance with market rules. Moreover, the rapid develop-
ment of information technology has greatly changed the way
of information exchange, making off-site regulation much more
practical than ever. For example, an online market informa-
tion platform connecting market participants, market operator,
and power exchange can integrate market operation data into
a single system, and in this way the timeliness, integrity, and
authenticity of the information can be significantly improved.
Advanced technologies, such as big data, artificial intelligence,
and emerging cloud/edge computing, can also be applied in
electricity market regulation in the future.
6 CONCLUDING REMARKS
To help researchers have an overall understanding of existing
policies of electricity market regulation, detailed comparisons
of state-of-the-art electricity market regulations in four devel-
oped countries with widely recognized electricity markets are
presented and discussed here. Some key elements of electric-
ity market regulation, including the regulatory authority, legisla-
tive framework, wholesale market regulation, retail market reg-
ulation, and regulatory approaches, are systematically addressed
and compared.
The comparisons show that the marketization process of the
electricity sector is usually driven by legislations rather than
administrative orders, and regulatory bodies of mature elec-
tricity markets are all given with legislative guarantees on their
authority and scope of functions. Therefore, their decision-
making process can be independent from stakeholders, and
their regulatory power is granted and also restricted. Among the
developed countries concerned, the contents of wholesale elec-
tricity market regulation are marked by a series of deep dispar-
ities due to differences among market mechanisms. Although
it is hard to find a universal regulatory method for whole-
sale market regulation, the developed countries concerned have
found their own ways in enforcing wholesale market compli-
ance. Regarding electricity retailing, the evolvements of retail
electricity market liberalization are at different levels in different
countries and states, and the variations of regulation priorities
and pricing schemes are then manifested. In those regions with
retail electricity competition, retail market access, credit man-
agement, last resort supply scheme, and the regulated default
price scheme, are the focuses of regulation. To enforce regu-
lations, multiple regulatory approaches are developed, with the
entire cycle of market operation covered. Compared with audit,
investigation and other ex-post regulatory approaches, ex-ante
regulatory approaches have lower cost and higher transparency,
and are therefore preferred by market participants.
Nevertheless, the evolving generation mix and electricity
market mechanism have imposed new requirements for mar-
ket regulation. Certain aspects of up-to-date energy policies are
surveyed to reveal the latest concerns regarding electricity mar-
ket regulation, including emission reduction, renewable energy
generation integration, security and adequacy of electricity sup-
ply, and recommendations on counter measures provided.
Finally, the status of the electric power regime reform and
electricity market regulation in China is presented, with existing
drawbacks stated, typically on regulatory function allocations,
legislative guarantee, and regulatory approaches. Based on com-
parisons and analysis, the future electricity market regulation in
China is prospected.
ACKNOWLEDGEMENT
This work is supported by National Natural Science Foundation
of China (Grant No. U1910216).
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