Market Design and Technological Development in Electricity Systems

The electricity industry is currently undergoing a major transition in its technological and institutional paradigm. Agents demand a more sustainable industry to cope with the efforts to mitigate climate change effects, while consumers pressure for a more participative industry, enrolling in services that were exclusive to traditional firms. This movement toward an energy transition triggers change on both technological and institutional sides, which happen simultaneously and are codependent one from each other under a coevolutionary process. In this chapter, we study the coevolution of technologies and rules in the electricity sector by evaluating the effects of R&D incentive policies and the market design of a new distributed service. We show that (1) technology-neutral policies may favor the development of technologies that already have high business value, and that (2) in order to avoid technological lock-in, policies would benefit from focusing on the attributes that allow technologies to be service suppliers. We develop an agent-based model to test our hypotheses. Our results show that new consumer-centered services generate more incentives for cutting-edge innovations compared to a direct technology-neutral R&D incentive, which benefit technologies that are already marketable.