Leveraging the Need for Innovation in Developing Countries to Boost Market Performance and Energy Trade
Well-functioning electricity markets can provide efficient price signals to guide, dispatch, and inform investment. Consequently, these markets are required to stimulate the appropriate and timely investment needed to achieve affordable low-carbon and electricity security goals.
Moreover, well-functioning electricity markets facilitate and support the achievement of the targets for SDG 7. These markets are becoming extremely important in a world undergoing an accelerated energy transition, driven by rapidly changing technological, environmental, and economic factors. These factors include a reduction in the cost of renewables which has led to their progressive adoption. In addition, the decentralization of electricity generation, which is propelled by increasing availability, has reduced the costs of distributed energy resources. Changes in the responsiveness of demand have been enabled by the advancement of information and communication technologies (electric vehicles, smart metering, digitalization) and socioeconomic transformation (urbanization, industrialization).
This has provided governments in developing countries with the possibility to leverage the need for innovation in market design to ensure the integration of variable renewable energy and accelerate decarbonization while maintaining a reliable power supply. Markets need to facilitate appropriate financial incentives and flexible resources (such as demand response providers and battery storage) to renewable generators to maintain supply reliability.
In 2021, ESMAP established the Electricity Markets, Grid Connectivity and Regional Trade (MARCOT) program, which provides governments in developing countries, and World Bank operational teams, with expert advice on electricity markets. MARCOT serves as a consolidated center of expertise on power market design and operation tailored to the unique needs of developing countries.
The MARCOT program supports World Bank teams, governments in developing countries, and regional teams in designing and implementing energy sector reforms, primarily focusing on establishing well-functioning, competitive, and transparent national and regional electricity trading markets.
It provides support through three main workstreams:
- Guidance: Developing a solid global knowledge base on the agenda of markets, connectivity, and trade, including guidance on market design, best practices for regional connectivity, and the introduction of trading regimes.
- Knowledge: Tailoring global research and data-gathering to the unique circumstances of developing countries. It also facilitates global knowledge exchange on an advanced market design that focuses on flexible generation investments, dynamic pricing, efficient transmission investments, and demand-side participation.
- Regional solutions: Supporting governments in developing countries in preparing regional energy projects and developing innovative regional solutions, such as advanced regional electricity markets and positioning them to qualify for the country and regional grants.
The MARCOT Program is co-managed by ESMAP and the Global Knowledge Unit of the World Bank Energy and Extractives Global Practice, and is organized around two pillars:
- Markets and Trade (or “Soft Infrastructure”): Supporting, designing, and implementing measures toward modern electricity trading markets that allow price discovery, improve the operational efficiency of power systems, attract investments, and increase power trade within national and regional markets.
- Connectivity and Grid (or “Hard Infrastructure”): Connecting individual markets and increasing the number of interconnected countries and regions.
Between 2020 and 2021, the MARCOT program allocated technical assistance grants to 16 activities in the regions of East, West, and Central Africa, the Middle East and North Africa, Latin America and the Caribbean, Europe and Central Asia, and South Asia. The projects focused on increasing the number of countries with established or improved markets for energy services and interconnected grids. It also supported an increase in regional trade and financing from public and private sources.
The program established a partnership with the Regulatory Indicators for Sustainable Energy (RISE) to create a comprehensive, regularly updated database of power markets globally. The database holds information about the electricity sector’s market characteristics and development over time, presenting a completely new and unique tool to benchmark the performance of emerging markets. The MARCOT program has also launched a series of formal training courses on the “Fundamentals of Energy Markets.”
The program includes an associated Multi-Donor Trust Fund on Advancing Regional Energy Projects in Southern and Eastern Africa (AREP MDTF). This was established in 2016 to channel donor funding to advance the preparation of regional energy projects in the Southern and Eastern Africa regions and support the development of an enabling environment for power trade. The primary donors of the AREP MDTF are the Swedish International Development Cooperation Agency (Sida) and the Norwegian Agency for Development Cooperation (Norad).