The Dynamics of

Variable Renewable

Energy Integration:

A Multi-Dimensional

Framework for Future

Power Systems

Selahattin Murat Sirin, Sandrine Wachon,

Amro Elshurafa

May 2025 I Doi: 10.30573/KS--2025-DP17

Discussion Paper

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The Dynamics of Variable Renewable Energy Integration:

A Multi-Dimensional Framework for Future Power Systems

Abstract

This paper examines the impacts of integrating a high share of variable

renewable energy (VRE) on power systems and markets, proposing a multi-

dimensional framework to analyze its technical, economic, and regulatory

challenges. A structured literature review and topic modeling are employed,

and key constraints, incentives, signals, and risks associated with VRE

integration are identiﬁed. The authors then propose measures to address the

key challenges posed by VRE at dierent stages of system penetration. The

analysis is illustrated with practical examples from diverse electricity systems

worldwide, demonstrating a common set of solutions applied across dierent

countries, each with distinct legal, regulatory, and technical contexts. A holistic

approach – combining technological innovation, adaptive governance, and

coordinated policy – will be crucial for ensuring an aordable, reliable, and

sustainable electricity supply in a VRE-dominant future.

Highlights

• The integration of variable renewable energy (VRE)

signiﬁcantly reshapes electricity market dynamics,

introducing complexities such as increased

volatility, declining average market prices, and

investment uncertainty.

• We propose a comprehensive multi-dimensional

framework for analyzing the integration challenges of

high shares of VRE into power systems, considering

technical, economic, and regulatory dimensions.

• We identify a universal set of solutions adapted

across dierent system contexts (e.g., island,

interconnected, meshed, distributed), emphasizing

the importance of customized approaches

depending on system characteristics and stages of

renewable energy penetration.

The Dynamics of Variable Renewable Energy Integration:

A Multi-Dimensional Framework for Future Power Systems

1. Introduction

The integration of variable renewable energy technologies (VREs), also

known as intermittent renewable energy sources (iRES), into power systems

has emerged as a key area of research in the global eort to mitigate climate

change and transition to sustainable energy sources. While accelerating the

adoption of VREs, such as wind and solar, is crucial for achieving climate

policy goals and brings multiple beneﬁts to the power systems, it also poses

major challenges for markets (Ambec and Crampes 2012; Blázquez et al.

2018; Keppler, Quemin, and Saguan 2022; Joskow and Tirole 2008; Roques

and Finon 2017). In terms of market design, a discussion about what the future

power system will look like under the very high share of zero or negligible

marginal cost generation technologies is ongoing (Hu et al. 2018; Joskow

2019; Papaefthymiou and Dragoon 2016; Thomaßen, Redl, and Bruckner

2022; Wolak 2021).1

Fundamentally, the problems related to the integration of

VREs are seen as ﬂexibility and coordination problems

(De Vries and Verzijlbergh 2018); some studies have

argued that intermittent technologies would not aect the

fundamental features of electricity markets (Bigerna and

Bollino 2016; Leslie et al. 2020; Wolak 2021) and it is an

“issue of economic eciency” (Henriot and Glachant, 2013,

p. 57). On the other hand, some scholars have argued that

market designs with short-term zero marginal cost pricing

are incompatible with the massive intermittent renewable

energy investments required (Blázquez et al. 2018; Keppler,

Quemin, and Saguan 2022; Roques and Finon 2017). In

this respect, the discussions on how to create “ecient

price signals” to achieve socially optimal electricity market

outcomes (price and generation mix) and how to integrate

VREs into these markets are ongoing (De Vries and

Verzijlbergh 2018; Fabra 2023; Henriot and Glachant 2013;

Hiroux and Saguan 2010; Pérez-Arriaga and Batlle 2012).

While the insights of these studies are valuable, focusing

on speciﬁc elements of market designs may not reveal

the connectedness between technical, economic, and

regulatory (political) dimensions of electricity market

architecture under high VRE diusion. A systemwide

framework is necessary for mitigating coordination issues

and addressing the technical and operational constraints

along with strong intertemporal dependencies (Keppler,

Quemin, and Saguan 2022). Therefore, this study aims to

present an integrated review of the implications of high

intermittent renewables penetration on the key structural

elements of the electricity markets.

We build our conceptual framework on an integrated

approach and explore the problems at the intersection

of political and institutional dimension (energy policy and

regulation) and techno-economic dimension (resources,

infrastructure, and markets). This framework is helpful

for highlighting the coordination issues arising between

energy policy targets and power system operation

objectives, and the underlying causes of these issues:

externalities, uncertainty, and multi-objective (and mostly

conﬂicting) policies. Then, we map how these problems

are reﬂected on the electricity markets through key

transmission mechanisms (constraints, incentives, signals,

and risks). Finally, we outline and categorize the issues

covered in the literature and discuss their policy and

regulatory implications.

Section 2 starts with the methodology and literature review

that explores how literature has evolved over time and

the emerging issues. Based on the framework developed

in Section 2, Sections 3 and 4 discuss the technical and

economic issues covered in the literature. Section 5

discusses the remedies and solutions to deal with these

problems. Finally, Section 6 concludes the article.

The Dynamics of Variable Renewable Energy Integration:

A Multi-Dimensional Framework for Future Power Systems

2. Methodology and

Literature Review

Many studies have examined the integration of renewable energy

technologies, covering issues from multiple perspectives – from technical

integration to the political economy of new technologies. Given the extensive

number of academic and policy studies, we follow a multi-stage methodology,

as presented in Table 1, to ensure consistent analysis.

We start with a literature review using topic modeling

to understand the dierent aspects of VRE integration

and which issues are emerging as the global demand for

sustainable and cleaner energy technologies increases.

In the second step, we deﬁne the elements of market

architecture, and we highlight the underlying causes

of problems introduced by the high share of VREs

(multi-objective policies, externalities, and uncertainty)

and their implications on the elements of electricity

market architecture.

In the third step, we use the industrial organization

literature to map key transmission channels that aect

the market architecture. We ask three questions to

understand the dynamics:

1. How does the increasing share of VREs aect the

constraints (technical and non-technical limitations and

restrictions impacting market operations and agents’

actions) on structural and operational framework?

2. How does the increasing diusion of VREs aect

incentives?2

3. How does the increasing diusion of VREs aect

signals and risks (information and indicators guiding

market participant decisions)?

Then, we categorize the issues and problems in electricity

markets in Step 4. In Steps 5 and 6, we cover the solutions

to these issues and discuss their implications on policy

and regulations.

The Dynamics of Variable Renewable Energy Integration:

A Multi-Dimensional Framework for Future Power Systems

Table 1. Framework for assessing the impact of high intermittent renewable energy on power systems.

Research question: What is the impact of high intermittent renewable energy on the power system?

Step 1. Literature review using topic modelling

Step 2. Mapping market architecture and the interplay between its elements

Step 3. Exploring the key transmission channels (constraints, incentives, signals, and risks)

Step 4. Deﬁning the issues and problems with increasing share of VREs

Step 5. Mapping the solutions to deal with these problems.

Step 6. Discussing the implications for policy and regulations

2.1. Literature

Review Using Topic

Modeling

We began the literature review by formulating the

following research question: “What is the impact of high

intermittent renewable energy on the power system?”

Using the Web of Science (WoS) and Google Scholar

databases and relevant keywords (high renewable energy

penetration; increasing renewable energy penetration;

electricity market architecture; electricity market design),

we conducted a literature search covering the studies

published after 2000.3

Then, we conducted text analysis on the abstracts of

these papers using natural language processing (spaCy)

and topic modeling (gensim) techniques in Python

programming language.4 The number of topics was

determined based on the UMASS coherence score

(Mimno et al. 2011), which evaluates the model’s ability to

produce coherent and interpretable topics. Following LDA

model, the topics and keywords are evaluated using Chat-

GPT-4o-mini large-language model (LLM) for consistency,

and the keywords are classiﬁed under themes and

subthemes.

The overall process created nine major themes and 27

sub-themes, as presented in detail in Appendix 1. The

major themes are:

• Market Structures and Mechanisms: Focuses on

price formation dynamics, strategic bidding behavior,

and market design issues.

• Decarbonization and Energy Transition: Addresses

emission management mechanisms and policy tools

promoting clean energy adoption.

• Distributed and Decentralized Energy Resources:

Highlights the rise of microgrids, prosumer models,

and distributed energy management.

• Energy Storage and Flexibility: Examines battery

storage deployment, grid ﬂexibility services, and the

role of demand response with increasing renewable

energy penetration.

• Optimization and Advanced Analytics: Centers

on advanced optimization techniques, predictive

models, and machine learning applications.

• Policy and Regulation: Discusses market reforms,

eectiveness of economic incentives, governance

challenges, and cross-border market integration.

• Technological Innovations: Covers emerging

technologies, advancements in grid operations,

and factors inﬂuencing technology adoption and

innovation diusion.

• Investment and Economic Analysis: Focuses

on ﬁnancial modeling, cost assessment, risk

management, and market transaction mechanisms.

• Integrated Power System Operations and Planning:

Addresses coordinated system operations, network

optimization, and integration of hybrid and multi-area

energy systems.

The Dynamics of Variable Renewable Energy Integration:

A Multi-Dimensional Framework for Future Power Systems

These themes clearly reveal the multi-layer structure

of VRE integration and its implications on the power

system. This classiﬁcation fundamentally shows two

major dimensions of the VRE integration: the political

and regulatory dimension and the techno-economic

dimension (markets, resources, technology). On the other

hand, the socioeconomic and sociotechnical dimensions

of the energy transition did not emerge as major themes

in the review. Given the progress in decarbonization and

electriﬁcation, electricity markets will play a greater role

as an allocation mechanism in the future energy systems.

Thus, the lack of socioeconomic and sociotechnical

studies reveal an important gap in the literature that

should be addressed in future research. Speciﬁcally,

further study is needed to assess how the integration of

renewable energy sources aects the aordability and

fairness of access to electricity, and, indirectly, the cost

sharing associated with VRE integration.

The Dynamics of Variable Renewable Energy Integration:

A Multi-Dimensional Framework for Future Power Systems

2.2. Market

Architecture and the

Interplay Among its

Elements

The literature review has shown that there are two key

dimensions of VRE diusion. Therefore, we follow an

integrated approach to map these dimensions onto the

electricity market architecture (De Vries and Verzijlbergh

2018). This architecture consists of four components,

which are presented in Figure 1:

1. Energy Policy, which is shaped by the overarching

goals of aordability, reliability, and environmental

protection, establishes renewable energy targets

to guide the “socially optimal generation mix”

under security of supply constraints. By socially

optimal generation mix, we refer to the outcome

that is planned by a social planner that selects the

investments with the lowest long-term cost (Finon

and Roques 2013). Given the increasing integration

with the other parts of the energy system due to

decarbonization and electriﬁcation, the availability

of new technologies (e.g. hydrogen, direct-carbon-

capture) also changes the boundaries of the power

sector, and it has implications on the “socially

optimal” generation mix. In addition, the security of

supply implies redundancies in the system, and how

these costs will be allocated to the society imposes

additional constraints on the following components

(Zachmann et al. 2023).

2. Regulation sets the economic and operational

frameworks that deﬁne the boundaries of the power

system and power markets to achieve the optimal

generation mix. Economic regulation is expected

to reﬂect changes in social preferences and

therefore policy targets (Pollitt et al. 2024). Thus,

regulation is expected to focus on appropriate use

of prices, incentives and institutional arrangements

to internalize externalities, especially carbon

externalities and system reliability, while also

addressing distributional impacts (such as higher

prices amid increasing demand for low-income

households), consumer-protection and market power.

Figure 1. Four components of market architecture.

Policy

objectives

Aordability

environment

reliability

Reliability Adequacy

Power system

operation

Power system

RES t argets

Supply

security

Price signal

Regulation

Economic

incentives

Operational

framework

Power market

Operational

incentives

Generation, transmission

and distribution

investment decision

Generation mix

Demand

Environmental

externalities

Innovation

externalities

Public good

Transmition and

distribution infrastructure

Risks

Socially

optimal

generation

mix

Public

good

Energy policy

Short-term

markets

Long-term

markets

Uncertainty

Source: Authors’ analysis.

The Dynamics of Variable Renewable Energy Integration:

A Multi-Dimensional Framework for Future Power Systems

3. Power System consists of infrastructure and

resources and operates under reliability and

adequacy constraints in operations.

4. Power Market creates the signals that direct agents’

decisions in short-term and long-term operations,

which eventually aects the socially optimal

generation mix. There are two founding designs in

competitive wholesale power markets: decentralized

markets and centralized markets, which dier

signiﬁcantly in structure and regulation (Ahlqvist,

Holmberg, and Tangerås 2022). Both designs have

merits, and the pros and cons of each design are

widely discussed in the literature (Silva-Rodriguez

et al. 2022). As the share of VREs in the power

system increases, both designs have encountered

signiﬁcant problems, and new mechanisms have to

be developed to deal with emerging issues.

While the interactions with these four components

are expected to perform smoothly in an ideal setting,

the technical characteristics of the power system

present signiﬁcant challenges, particularly network

externalities, and the increasing penetration of VREs

can exacerbate these issues (Ambec and Crampes

2012; Keppler, Quemin, and Saguan 2022; Sovacool

2009)”plainCitation”:”(Ambec and Crampes 2012; Keppler,

Quemin, and Saguan 2022; Sovacool 2009.

First, as highlighted in many studies (Ambec and

Crampes 2012; Blázquez et al. 2018), dispatchability of

power and positive marginal costs are the key market

design elements of current systems. However, VREs are

characterized by production variability, low-predictability/

uncertainty and locational-dependence (Henriot and

Glachant 2013; Hu et al. 2018), and the current designs

are not equipped to handle high share of intermittent and

zero marginal cost generation technologies.

Second, power system reliability has the characteristics

of a public good (non-excludable and non-rivalrous),

this means that it is not feasible to prevent individuals

from accessing or beneﬁting from it. Therefore, there

are positive externalities, and the beneﬁts and costs

associated with system reliability and managing the real-

time supply-demand balance cannot be fully allocated to

the responsible parties (Bigerna and Bollino 2016; Keppler

2017).

Third, the price elasticity of demand for electricity is low

in current systems, and retailers lack sucient incentives

to hedge risks because of market price caps and

insucient infrastructure to measure real-time demand

(Wolak 2021). Furthermore, consumers respond dierently

than the theoretical rational behavior model due to

cognitive biases and information asymmetries, and the

heterogeneity in consumer behavior aects both short-

term market dynamics and long-term investment behavior

(Bigerna and Bollino 2016).

Fourth, information asymmetries and externalities aect

the interactions between short-term markets and long-

term markets, so the price signals may not reﬂect the true

opportunity costs. Finally, VRE investments introduce

signiﬁcant price uncertainty and increase the system’s

vulnerability to external shocks, notably weather shocks.

Collectively, these issues create additional challenges for

both economic agents and regulators within the current

market designs.

In addition to network-related externalities and power-

system speciﬁc issues, there are externalities that need

further attention under high VRE diusion. The ﬁrst one

is the innovation externalities in electricity markets. The

declining research and development (R&D) and innovation

expenditures has always been a concern in electricity

market reforms (Jamasb, Nuttall, and Pollitt 2008; Jamasb

and Pollitt 2015). Some scholars have argued that R&D

spending in regulated markets was often driven by

political and social concerns, leading to inecient use of

resources; therefore, the reduction in R&D expenditure

might not necessarily hinder technological innovation.

However, uncertainties related to liberalization and

deregulation have adversely aected both public and

private sector R&D investment decisions (Costa-Campi,

Duch-Brown, and García-Quevedo 2014; Jamasb and

Pollitt 2015). This problem can be exacerbated as the

diusion of VREs put stress on the revenues and proﬁts of

other ﬁrms (Keppler, Quemin, and Saguan 2022).

The second important externality is environmental,

notably carbon emissions, and fossil-fuel subsidies that

distort electricity market operations (Borenstein and

Bushnell 2022; Keppler, Quemin, and Saguan 2022). Due

to the externalities related to the carbon emission, the

market value of VREs do not reﬂect the social value of

these investments, and this distorts incentives under the

current designs (Bigerna and Bollino 2016; Borenstein and

The Dynamics of Variable Renewable Energy Integration:

A Multi-Dimensional Framework for Future Power Systems

Bushnell 2022). Although carbon pricing mechanisms

are necessary for reducing externalities and contribute

to true marginal cost of generation technologies, the

interplay between carbon mechanisms and electricity

markets is complex, involving factors such as regulatory

frameworks, market design, and the varying carbon

intensity of electricity generation across regions (Petitet,

Finon, and Janssen 2016; Thomaßen, Redl, and Bruckner

2022). Subsidies to fossil fuels also create a major barrier

to incentivize clean energy investments and distort market

signals in favor of coal and gas-powered generators

(Droste, Chatterton, and Skovgaard 2024; Zeppini and

van den Bergh 2020). There is a growing pressure on

governments to reduce these subsidies; however, studies

show that removal of subsidies is intertwined with carbon

taxation proposals (Harring et al. 2023).

2.3. Mapping

the Change in

Key Transmission

Channels with

Increasing Share of

VREs

The next step is mapping the transmission channels that

reﬂect the changes at the policy and regulation level

to the power market level. For this purpose, we refer to

the industrial organization literature and deﬁne three

elements as transmission channels. Table 2 presents

the changes in key transmission mechanisms as more

VREs are integrated into the system, further sections will

present detailed discussions.

The ﬁrst element is constraints, which include the

limitations and restrictions impacting market operations

and agents’ actions. In electricity markets, constraints

include various technical and non-technical limits and

restrictions that impact market operations and feasible

actions of participants. These can be physical (e.g.,

capacity limits of power plants, operational security limits),

regulatory (e.g., emissions regulations), or economic

(e.g., investment capital availability). Constraints aect

the feasible sets and change the opportunity costs of

transactions.

The second element is incentives, which are mechanisms

and rewards inﬂuencing agents’ behavior towards market

transactions and interactions with other agents. In

electricity markets, incentives can be economic, ﬁnancial,

or regulatory, aiming to align individual interests with the

market (achieving economic eciency) or policy goals.

Theoretically, perfectly competitive markets induce

market participants to reveal their true preferences and

true opportunity costs, and this creates outcomes that

correspond to the best possible social outcome (Leslie et

al. 2020). In this respect, competitive electricity markets

inherently create economic incentives for eciency.

However, the idiosyncratic characteristics of electricity

markets limit achieving perfectly competitive electricity

markets, and additional incentive mechanisms have

to be implemented due to various market frictions in

practice (Joskow 2019; Joskow and Tirole 2008). The

increasing share of VREs may exacerbate such problems

and create disparities between “the private incentives

facing individual participants and the social impact of their

actions” (Leslie et al. 2020, p. 1).

Finally, the third element consists of signals and risks,

which are information and indicators guiding market

participant decisions. In electricity markets, market price

is the key signal.5 Accurate and timely price signals are

essential for market eciency, enabling participants to

respond appropriately to changing market conditions and

incentivize them to manage risks. The immediate eect

of VREs has been observed in market prices; however,

there are also changes in idiosyncratic and systematic

risks, which are expected to inﬂuence agents’ behavior. In

ecient markets, these risks would be reﬂected in prices.

Yet, market frictions prevent prices from fully capturing

them. As the share of VREs increases, these changes in

risk can impact investment decisions, risk management

strategies, and overall market participation (Mahoney and

Qian 2013).

The Dynamics of Variable Renewable Energy Integration:

A Multi-Dimensional Framework for Future Power Systems

Table 2. Summary of the changes in transmission channels with high share of VREs.

Change in constraints

• Increasing correlation in unit availability

• Increasing vulnerability to weather conditions

• Increasing trade-os between technical viability and economic eciency

• Increasing information complexity

• Decrease in ﬂexibility

• Change in transaction costs

Change in incentives

• Anti-competitive behavior and strategic bidding by generators

• Anti-competitive behavior by transmission/distribution system operators

• Incentives to distort information

• Potential conﬂict of interest between operation and ownership

• Increasing free-rider problem in system operations (allocation of integration costs)

• Incentives for vertical integration of generation and storage assets

• Increasing real-time market engagement (less incentives for bilateral contracts)

• Disincentives for demand response

• Investment disincentives under declining average prices

• Moral hazard/adverse selection in risk management

Change in signals and risks

• High volatility/low average market prices

• Liquidity and counterparty risk

• Resource adequacy/investment risk

• Market distortion risks due to frequent government interventions

• Information asymmetry

• Incomplete/missing markets

• Increased redundancies

Source: Compiled through literature review by authors.

The Dynamics of Variable Renewable Energy Integration:

A Multi-Dimensional Framework for Future Power Systems

2.4. Mapping the

Issues with an

Increasing Share

of VREs

The fourth step involves categorizing the issues and

problems encountered as the share of VREs in the

power system. We develop our review along two main

dimensions as presented in Table 3: Technical and

operational dimension and Economic and ﬁnancial

dimension. The ﬁrst dimension covers the physical

integration of intermittent renewable energy sources

(VREs) into the power system. The second dimension

examines the economic and ﬁnancial impacts of

integrating VREs into the power system.

The temporal dimension is also very important in

electricity market analysis, and the majority of problems

emerge from the intertemporal inconsistencies between

the short-term and long-term market objectives (Fabra

2023). The short-term covers the timeframe in which the

economic agents’ behavior is shaped by the operation

of existing assets, whereas the long-term covers

the timeframe in which the agents can change their

assets through expansion or retirement of the asset.

In other words, agents’ investment decisions become

endogenous to the market dynamics in the long term.6

In the short term, economic eciency is satisﬁed when

supply bids are oered at marginal cost (or opportunity

cost), demand bids are oered at the true willingness to

pay, and market satisﬁes a number of conditions (e.g.,

free exit and entry, no information asymmetries, no

externalities). When these conditions are satisﬁed in the

short term, markets, theoretically, also satisfy long-term

eciency (socially optimal generation mix) by creating

incentives for new investments (Cramton 2017; Leslie et

al. 2020). On the other hand, theoretical assumptions

are not satisﬁed in many cases, and long-term investment

decisions are mostly determined by policy goals, not by

market forces

We should note that these categories are not mutually

exclusive and there are many overlapping elements.

Furthermore, the urgency and importance of these

issues also vary with the market context, which can dier

signiﬁcantly across jurisdictions. Nevertheless, this is the

result of the complex nature of the power system (Sun et

al. 2021), and we will explore these issues in detail in the

following sections.

Table 3. A summary of issues with the high diusion of VREs technologies.

Short-term issues Long-term issues

Technical and operational

dimension

• System reliability/ﬂexibility

• Integration of front-of-the-meter (FTM)

technologies

• Integration of behind-the-meter (BTM)

technologies/microgrid management

• Transmission and distribution coordination

of VREs

• Transmission and distribution investment

planning

• Interconnected system coordination

Economic and ﬁnancial

dimension

• Change in market price dynamics: Increasing

volatility; merit-order eect; cannibalization;

depredation; negative prices

• Change in agent behavior/anti-competitive

practices

• Integration of new technologies in market

operations and the emergence of multi

equilibria

• Scarcity pricing/price caps

• Front-of-the-meter (FTM) compensation/

support scheme design

• Behind-the-meter (BTM) compensation/

market participation/support scheme design

• Security of supply/resource adequacy

(missing money problem)

• Insucient hedging instruments and market

incompleteness

• Environmental and system externalities

The Dynamics of Variable Renewable Energy Integration:

A Multi-Dimensional Framework for Future Power Systems

3. Technical and

Operational Issues

with Increasing VRE

Integration

The integration of VREs into power systems presents signiﬁcant technical

challenges, so operational and planning strategies need to be reexamined

to ensure system ﬂexibility7 and reliability (Sun et al. 2021). The intermittent

nature of VREs creates additional complexities and alters the technical

and economic constraints of the power system (Impram, Varbak Nese, and

Oral 2020).

Furthermore, the changes in system constraints and

system operations aect incentives and risks, and there

is an increasing trade-o between technical viability and

economic eciency under high share of VREs within

the current market designs, due in part to the growth of

small-scale VREs (Davi-Arderius Jamasb, and Rosellon

2024; Gowrisankaran, Reynolds, and Samano 2016;

Grimm 2022).

There are four major technical and operational issues in

the short-term with the diusion of VREs technologies:

ensuring system reliability and ﬂexibility within the

existing designs; integration of front-of-the-meter (FTM)

technologies; integration of the behind-the-meter (BTM)

technologies; and coordination of transmission and

distribution operation to ensure system reliability (Sun

et al. 2021). The ﬁrst major challenge involves ensuring

system ﬂexibility, “the ability of an electricity system to

adjust to the variability of generation and consumption

patterns and grid availability across relevant market

timeframes” (ACER 2024), with the current market

design under increasing share of VREs (Impram, Varbak

Nese, and Oral 2020; Wolak 2021). Non-synchronous or

invertor-based VRE technologies cannot provide system

inertia, while conventional generators can (Newbery

2023). In addition, increasing share of VREs in power

supply increases the system’s vulnerability to seasonal

and stochastic components of weather, and this increases

physical and operational risks within the market (Fabra

2021; Thomaßen, Redl, and Bruckner 2022). Uncertainty

in weather conditions and extreme weather events

directly aect the availability of VREs, leading to supply

(through FTM technologies) or demand (through BTM

technologies) ﬂuctuations that can distort grid stability.

The second challenge is related to the integration of

FTM technologies with intermittent and non-synchronous

generation for ﬂexibility. While there are some successful

application of very high RES in small systems (Sun et al.

2021), the impact on the large system are still unknown.

Furthermore, multi-period dispatch and re-dispatching

processes (curtailment or activation) have become an

issue for the system operators, as increasing VREs

increases trade-os between technical viability and

economic eciency (Davi-Arderius, Jamasb, and Rosellon

2024; Hogan 2022; Newbery 2023). Theoretically,

The Dynamics of Variable Renewable Energy Integration:

A Multi-Dimensional Framework for Future Power Systems

ecient electricity markets imply ecient use of the

network (Hogan 2022). However, economic dispatch

is subject to transmission and security constraints, and

recent empirical studies have shown that the increasing

share of VREs had adverse welfare implications, reducing

total welfare or increasing emissions due to transmission

line congestion and/or re-dispatching (Davi-Arderius and

Schittekatte 2023; Petersen, Reguant, and Segura 2024).

The third challenge involves the integration of BTM

technologies and the management of these technologies

for short-term system reliability and long-term resource

adequacy. An increasing share of BTM resources adds

uncertainty in for system operations. Managing these

resources at the distribution level, notably addressing

active and reactive power conditions, is a daunting task

and increase the system costs (Hogan 2022). On the

one hand, these technologies are creating incentives for

small consumers to adjust their demand and respond to

market dynamics (Pollitt et al. 2024); many regulators are

encouraging aggregation to increase demand ﬂexibility.

However, mass diusion of these technologies also make

aggregation more dicult and creates additional reliability

and forecasting diculties (Sun et al. 2021). In addition,

aggregation enables services at the distribution and

transmission level; however, there are still issues such as

preventing dual compensation for these services (Sun et

al. 2021).

Fourth, enhanced short-term transmission-distribution

coordination and long-term investment planning

constitute another challenge for system operators. In

the traditional power sector, these activities could be

separated due to their distinct technical characteristics.

However, as more distributed energy resources (DERs)

become integrated into the power system, the system

must be reorganized to accommodate bidirectional

load ﬂows. In many cases, the net supply from the

consumer side cannot be only managed solely at the

distribution level in some markets. As the share of DERs

is expected to grow considerably in the future, at least

in some jurisdictions, how these technologies aect the

power system operations and how to incorporate these

technologies to provide grid services become major

problems for system operators (IEA 2024). A growing

number of economic agents increases information

complexity, and it becomes more computationally

expensive to get system constraints and ﬂow calculation

correctly in the market clearing algorithms.

Finally, spatial resolution (adjusting balancing areas)

becomes another challenging issue for the ecient

operation of the system under new dynamics. There

is a trade-o between larger spatial resolution (e.g.

larger balancing areas/zones) granular spatial resolution

(e.g., nodes); larger spatial resolution smooths demand

variation, creates more liquidity, and reduces total forecast

error of the intermittent generation. On the other hand,

larger balancing areas increase the integration costs of

the VREs because it fails to take spatial value of these

technologies (Hirth, Ueckerdt, and Edenhofer 2015). In

addition, this increases potential for a free-rider problem

on transmission capacity provision and cost allocation,

and it distorts investment incentives, particularly in

integrated power systems (Pollitt, Duma, and Covatariu

2024; Pollitt et al. 2024).

The Dynamics of Variable Renewable Energy Integration:

A Multi-Dimensional Framework for Future Power Systems

4. Economic and

Financial Issues with

the Increasing Share

of VRE Technologies

The most important and the immediate eect of the increasing share of VREs

is the shift in short-term market dynamics speciﬁcally, declining average

market prices and increased volatility, driven by zero-marginal-cost generation

and the intermittent nature of new these technologies (Bigerna and Bollino

2016; Bushnell and Novan 2021; Gowrisankaran, Reynolds, and Samano 2016;

Peña, Rodríguez, and Mayoral 2022).

Textbook electricity market designs are based on positive

marginal cost of dispatchable generation technologies,

and market clearing relies on the marginal cost of the

last unit, which is also theoretically equal to the marginal

social value of that technology. However, the marginal

cost of VREs is dierent than marginal value of VREs

because of the system costs and externalities associated

with them (Blázquez et al. 2018; Gowrisankaran, Reynolds,

and Samano 2016; Leslie et al. 2020; Ueckerdt et al. 2013).

Current market designs do not include the complete

system costs of VREs in dispatching, so the merit-order

eect signiﬁcantly impacts revenues in electricity markets

by prioritizing the dispatch of the lowest marginal cost

power sources, typically wind and solar, before more

expensive fossil-fuel-based generation. Consequently,

this both reduces the average market price (merit-

order eect), the revenues for dierent technologies

(depredation) and same technologies (cannibalization)

(Peña, Rodríguez, and Mayoral 2022). However, this eect

is not uniform, and recent studies, such as Peña et al.

(2022), show that the increasing share of VRE generation

has a non-linear eect both on level-prices and volatility.

While the average decline in wholesale market prices

is expected to beneﬁt consumers through reduced

electricity prices, it also creates major incentive problems

and aects the eciency of short-term markets in

resource allocation (Pollitt et al. 2024). First, declining

average prices reduce proﬁtability of conventional

generators and undermines their ability to recover the

ﬁxed-costs of their investments in energy-only markets

(Fabra 2021; Leslie et al. 2020).

Second, declining average prices and increasing volatility

create disincentives for consumers to adapt new ecient

and less carbon-intensive technologies (Fabra 2023).

Although some scholars have argued that introducing

real-time pricing at the retail level will create incentives to

respond to market prices and make decisions accordingly

(Leslie et al. 2020), in practice, real-time retail pricing has

been limited in many markets due to political or social

concerns or extreme weather events that might cause

signiﬁcant ﬁnancial burden on the end users.

Third, due to its uncertain nature, the high diusion

of VREs aects the arbitrage between markets

The Dynamics of Variable Renewable Energy Integration:

A Multi-Dimensional Framework for Future Power Systems

disproportionally (arbitrage eect). Owners of these

technologies prefer to engage in real-time operations

rather than day-head markets in energy-only markets;

therefore, the incentives for market engagement are

changing (Fabra 2023). In addition, balancing costs are

changing as the uncertainty in the availability of VREs

in real-time is increasing, and the availability of existing

storage investments is not compensating for the decrease

in dispatchable generation. As a result, operational

and ﬁnancial implications of VREs are dierent in terms

of revenue certainty and impact on the market than

dispatchable technologies.

Along with changing incentive structure, risks also change

with the diusion of intermittent technologies. The ﬁrst

major risk is the liquidity risk. Market liquidity refers

to the ease with which assets can be traded without

causing signiﬁcant price changes, and liquid markets

are necessary for ecient price formation. However,

change in market interconnectedness and less market

participation could reduce liquidity in forward markets

and limit short-term market eciency (Pollitt et al. 2024).

In addition to the liquidity, the increase in the number

of small-scale generators with intermittent technologies

increases the counterparty risk for hedging, due to their

limited scale and uncertain generation proﬁle. While the

aggregated management of these technologies reduces

liquidity and counterparty risks theoretically, this can also

create local market power, especially in nodes or local

zones with a few major generators and multiple small-

scale VRE investors.

Another emerging problem is the existence of multiple

potential market equilibria under increasing storage and

intermittent generation (Grübel et al. 2020). Multiple

market equilibria present a signiﬁcant challenge in

economic theory, as it complicates the prediction and

analysis of economic outcomes.8 The existence of

multiple equilibria is due to the unique characteristics

of the electricity sector including various idiosyncratic

generation technologies, network constraints, and

countless bidding possibilities. This phenomenon creates

substantial diculties for system operators because

it introduces indeterminacy and uncertainty regarding

system operations. Since real-time and forward markets

have interconnected characteristics, the presence of

multiple equilibria creates several problems for pricing

mechanisms and settlement procedures (Sun et al. 2021).

The change in competitive behavior and emerging

incentives for anticompetitive practices due to declining

proﬁtability and increasing complexity is another

problem. Competition and exercise of market power

has always been a soft spot in electricity market design,

and it has been one of the extensively explored topics

in the literature (Borenstein, Bushnell, and Wolak 2002;

Borenstein and Bushnell 2022; Fabra, von der Fehr, and

Harbord 2010; Hortaçsu and Puller 2008; Mansur 2008;

Puller 2007; Borenstein and Bushnell 2015). As more VREs

become integrated to the grid, it is expected that the

positive shift in the supply curve (the merit-order eect)

will reduce opportunities for exercising market power;

however, this also depends on the market context and

the ownership of generation and storage assets (Fabra,

2021; Andrés-Cerezo and Fabra 2023). Recent studies

have highlighted that the positive eect of VREs on

market competition can be oset by bidding behavior

of strategic players with conventional resources (Bahn

Samano, and Sarkis 2021; Batlle Pérez-Arriaga, and

Zambrano-Barragán 2012; Ciarreta, Espinosa, and Pizarro-

Irizar 2017; Acemoğlu , Kakhbod, and Ozdaglar 2017;

Fabra 2021; Genc and Reynolds 2019; Ito and Reguant

2016; Kakhbod, Ozdaglar, and Schneider 2021).

Furthermore, the increasing share of VREs is changing

the incentives at the transmission system operations.

Intrazonal transmission constraints are not taken into

account in many decentralized electricity markets, and

this incentivizes agents to engage in strategic bidding

(capacity withholding or ﬁnancial withholding), create

transmission constraints, and exercise of market power

at constrained times to take advantage of spatial and

temporal arbitrage opportunities (Pollitt 2023).

The change in short-term dynamics also aects long-

term dynamics, and the most crucial issue has been

changing resource adequacy needs, ensuring available

capacity to meet expected demand, and sustaining

investments in the long term. Theoretically, energy-only

markets are expected to create investment incentives

that will create the optimal generation mix in the long

run (Joskow 2021; Keppler, Quemin, and Saguan 2022).

However, the missing-money problem has always been

an issue in energy-only market designs, and this problem

can be partially solved by introducing additional support

and remuneration mechanisms (Blazquez, Fuentes,

and Manzano 2020; Bublitz et al. 2019; Joskow 2021;

Newbery 2016). As a result of declining average prices

and increasing system reliability needs, less ﬂexible base

load technologies are being adversely aected, either

reducing output or completely leaving the market.

The Dynamics of Variable Renewable Energy Integration:

A Multi-Dimensional Framework for Future Power Systems

As the uncertainty in the system increases and more

distributed energy sources are integrated in the system,

the “temporal and spatial reliability requirements” and

current resource assessment criteria have to change (Sun

et al. 2021). Existing resource-adequacy mechanisms

are mostly capacity-based approaches; however, the

intermittent technologies may not be available when they

are needed, and the temporal and spatial correlation

among VRE generators in small regions may exacerbate

the availability problem (Fabra 2021; Wolak 2021). This

creates a major challenge for support mechanisms, and

distribution of risks and costs of new investments under

high VRE regime is an ongoing debate (Finon and Roques

2013; Hogan 2022).

The other long-term problem is creating a generation mix

with government controlled procurement mechanisms,

namely auctions (Anatolitis, Azanbayev, and Fleck

2022; del Río and Linares 2014; Finon and Roques 2013;

Gephart, Klessmann, and Wigand 2017; Haufe and Ehrhart

2018). Technology-neutral auctions create competition

and inherently promote cost eciency by enabling

regulators to adjust support in alignment with the actual

cost of technology, thus preventing overcompensation

and fostering competition among bidders (Fabra 2021).

On the other hand, technology-speciﬁc auctions can

address the dierences in the development stages of

dierent technologies and does not crowd out immature

technologies (del Río and Linares 2014; Haelg 2020).

Information asymmetry between the auctioneer and

suppliers also aect the outcomes of renewable auctions

(Fabra and Llobet 2023).

The interplay of environmental externalities, notably

carbon emissions, with electricity markets has been

growingly debated in the literature (Keppler, Quemin,

and Saguan 2022; Petitet, Finon, and Janssen 2016). The

experiences from the European Union Emissions Trading

Scheme (EU ETS) and other market-based carbon pricing

mechanisms have shown that these mechanisms have

issues due to political interventions and administrative

control mechanisms, and raises concerns regarding

their role in high share VRE regimes (Newbery, Reiner,

and Ritz 2019; Quemin 2022). Furthermore, problems

caused by transaction costs, behavioral factors and

cognitive biases, information asymmetries, and other

market distortions can create wrong price signals that

cause insucient revenue to support investments in

clean energy technologies (Baudry, Faure, and Quemin

2021; Borenstein et al. 2019; Goulder and Parry 2008).

Recent studies suggest additional mechanisms such

as carbon-forward contracts or carbon CfDs that can

encourage industry decarbonization (Richstein and

Neuho 2022). Nevertheless, such additional mechanisms

might risk increasing complexity and overall costs due to

misdirected incentives and operational problems (Keppler,

Quemin, and Saguan 2022).

The Dynamics of Variable Renewable Energy Integration:

A Multi-Dimensional Framework for Future Power Systems

5. Variable Renewable

Energy Integration:

Challenges and

Solutions

The massive deployment of VRE, while maintaining a high level of power

system reliability and security of supply, necessitates a shift from generation

adequacy – which focuses solely on the ability of the generation ﬂeet (in

terms of technologies and volume) to meet future demand – to system

adequacy, where the focus is on the ability of supply, demand, and the

grid to adjust dynamically to ensure the balance between production and

consumption.

This shift involves recognizing the evolving attributes

of the demand curve, which is becoming more price-

elastic due to advancements in new technologies. A

systemwide framework is now essential to address the

coordination challenges posed (and highlighted) by high

VRE penetration, as well as to manage the technical

and operational constraints and strong intertemporal

dependencies (Keppler, Quemin, and Saguan 2022).

The issues and challenges of integrating VRE vary

signiﬁcantly depending on the stage of VRE integration

within a power system. There is no universal “one-size-

ﬁts-all” solution, as the eectiveness of integration

measures depends heavily on the unique characteristics

of each system, including its energy mix, grid

infrastructure, and the role of demand-side participation in

balancing supply and demand.

Nonetheless, the experiences of various countries

worldwide demonstrate that a common set of solutions

has been progressively implemented in a targeted

manner to address the challenges associated with

increasing VRE penetration. In advanced phases, where

VRE signiﬁcantly inﬂuences system operations, power

systems require a fundamental transformation. This

includes structural changes in system planning, market

design, and regulatory frameworks (IEA 2024).9

The Dynamics of Variable Renewable Energy Integration:

A Multi-Dimensional Framework for Future Power Systems

5.1. A Common Set

of Solutions

for All Systems

Based on previous studies (IEA 2024; IRENA 2019a,

2019c), reviews of government and international institution

websites (e.g., European Commission, IEA, Council of

European Energy Regulators, Asian Development Bank,

World Bank), and key insights from the literature review

outlined above, we have identiﬁed a common set of

solutions that have been progressively implemented.

These solutions are categorized into seven groups,

spanning institutions and the fundamental components of

a power system, in line with the approach developed in

the preceding sections.

5.1.1. Innovation

The Role of Technological Change in

Advancing Zero-Carbon Solutions

Technological change, especially through learning-by-

doing, will continue to play a critical role in reducing

the costs of wind, solar, and storage technologies while

fostering innovation in new, economically viable zero-

carbon technologies during the energy transition. This

trend has been evident over the past decade (Joskow

2021; Pollitt Duma, and Covatariu. 2024). Numerous

technological solutions for addressing VRE challenges

– such as energy storage, smart grids, and demand-side

management tools – are already commercially available.

However, policy and regulatory interventions are essential

to accelerate their widespread deployment.

In the context of higher stage of VRE penetration, while

viable technologies exist, their large-scale implementation

remains limited. This constraint underscores the need for

further testing and the provision of economic incentives to

support deployment at scale.

Enhancing Visibility and Controllability

Through Data Availability

The integration of smart technologies and equipment

signiﬁcantly improves asset visibility and controllability,

which are essential for system operators to maintain

supply security in a cost-eective manner. The ability

to monitor and control the power system in real time

enables more ecient operation, facilitates ﬂexibility, and

enhances the reliability of supply.

Figure 2. The common set of solutions for VRE integration.

Innovation

Infrastructure

Power system

operation

Regulation

Energy policy

Market design

Supply and

demand

dynamics

Source: Authors’ analysis.

The Dynamics of Variable Renewable Energy Integration:

A Multi-Dimensional Framework for Future Power Systems

5.1.2. Supply and Demand Dynamics

Given the evolving dynamics of supply and demand,

greater system ﬂexibility is needed.10 Historically, demand

variability has posed the primary challenge in power

systems. With renewables penetrating the system, supply

variability is also to be dealt with. With the electriﬁcation

of key sectors such as heating, cooling, and transport,

larger ﬂuctuations in demand are expected. Moreover,

climate change is likely to exacerbate these eects,

resulting in higher evening peaks and increased seasonal

demand, particularly in hot regions such as Southeast

Asia and India.

The rising shares of solar and wind power also

amplify supply variability, increasing the frequency

and duration of mismatches between generation and

demand. This challenge is particularly pronounced

during periods of low VRE generation, such as the

“dark doldrums” experienced in Europe and Japan.

As VRE penetration increases, the need for long-term

ﬂexibility becomes critical, extending beyond short-term

variability management.

To meet these ﬂexibility needs, a combination of

renewable technologies, such as VRE and hydropower,

can exploit their complementarities. This reduces reliance

on fossil fuels while minimizing carbon emissions and

operational costs.

Supply-Side Flexibility

On the supply side, ﬂexibility involves:

• Fast-Ramping Generation Sources: Hydroelectric

power and natural gas plants can rapidly respond to

ﬂuctuations in VRE generation.

• Energy Storage Technologies: Batteries and other

storage systems can address variability by quickly

compensating for supply-demand mismatches.

• Regional Interconnections: Linking regions with

diverse energy resources can smooth out localized

variability in renewable generation, ensuring

greater stability.

Demand-Side Flexibility

Engaging historically passive demand in power system

balancing plays an equally critical role (Peng and

Poudineh 2019). Leveraging large volumes of industrial

demand is particularly signiﬁcant, as it can oset the

inherent intermittency of VRE, reducing the need for

curtailment or storage. During periods of low wind or solar

output, demand can be reduced or shifted to maintain

system balance without over-relying on conventional

generation.

Demand-side ﬂexibility enhances system reliability

by distributing balancing responsibilities across a

larger number of engaged consumers. This reduces

dependence on conventional, often carbon-intensive

power plants for grid stabilization. It also contributes to

cost reductions for both individual consumers and the grid

as a whole. By incentivizing consumers to shift or reduce

demand during peak periods, peak loads are lowered,

reducing reliance on expensive peaking power plants.

This not only decreases immediate operational costs but

also alleviates long-term capital expenditures for grid

infrastructure expansion.

Demand response programs can be categorized into two

types:

• Explicit Demand Response: Consumers are directly

compensated for reducing demand during periods

of tight supply, often through capacity and balancing

markets. These programs incur costs for producers

and system operators.

• Implicit Demand Response: Price signals encourage

consumers to adjust their energy usage based on

system needs. However, this approach faces barriers

such as high activation costs, insucient incentives,

and counterproductive tari structures.

To design eective demand response programs,

regulators must consider three critical factors (IEA 2024):

(i) shiftability – the technical ability to reduce or shift load,

(ii) controllability – the capabilities of equipment and

technology, which are improving with electriﬁcation and

digitalization, and (iii) acceptability – users’.

5.1.3. Infrastructure

Grid development is essential for addressing locational

mismatches in electricity systems. Adequate grid capacity

is critical for securely transporting electricity from

production sites to consumption centers, necessitating

new connections11 and grid reinforcements to manage

increased power ﬂows and mitigate congestion.

Furthermore, grids play a pivotal role in integrating solar

and wind energy by enabling the geographical smoothing

of generation proﬁles, thereby enhancing the power

system’s ﬂexibility.

The Dynamics of Variable Renewable Energy Integration:

A Multi-Dimensional Framework for Future Power Systems

Existing grid eciency can be improved by optimizing

capacity utilization and interconnecting diverse regions.12

To accelerate the integration of VRE, various strategies

have been employed, including the establishment of

renewable energy zones (e.g., in Australia, Texas, and

the Philippines), locational pricing, and adjustments

to connection permits or network charges based on

location.13

5.1.4. Power System Operation

and Reliability

Back to Unbiased Economic Dispatch:

From Cost-Eciency to Flexibility

Subsidies and contractual constraints often distort

economic dispatch, creating ineciencies and artiﬁcial

costs. This occurs when power plants are required to

generate electricity regardless of their position in the

economic merit order. Mechanisms such as feed-in

taris, long-term contracts, and fossil fuel subsidies

reduce system ﬂexibility and lead to suboptimal resource

allocation. Removing or minimizing these distortions can

align dispatch with the true costs of generation, promoting

more ecient resource use and reducing system costs.

Clear market signals and accurate pricing mechanisms

– including allowing negative prices in markets linked

to dispatch – can incentivize investments in VRE,

demand-side management, and ﬂexibility solutions like

storage. Dispatch mechanisms can also be enhanced

by enabling the participation of smaller plants and

demand-side resources, which improves system variability

management. Additionally, reﬁning the geographical and

temporal resolution of dispatch decisions can further

enhance system ﬂexibility and optimize the management

of constraints.

These improvements are relevant to both regulated

and deregulated systems and require methodologies to

quantify, communicate, and value system ﬂexibility.

Forecast Accuracy: Improving Models and

Data for Reliable System Operation14

The accurate forecasting of demand and generation

is critical for eective system operation, inﬂuencing

scheduling, dispatching, and reserve allocation. As power

systems evolve, the focus shifts from forecasted peak

demand over a decade to evaluating “net demand,” which

reﬂects the system’s actual load after accounting for VRE

generation. This necessitates the adoption of stochastic

forecasting models that incorporate the variability of wind

and solar radiation, while also considering storage and

individual consumption with high temporal granularity

(Joskow 2021).

Improved VRE forecasting reduces reserve capacity

requirements and facilitates more ﬂexible operation,

particularly in short-term markets such as intraday

and day-ahead trading (Hirth and Ziegenhagen 2015).

Accurate forecasts are essential even at early stages of

VRE integration to prevent operational issues and are

increasingly critical at higher levels of penetration to

ensure energy security. Both supply-side and demand-

side forecasts are required, as VRE variability and

the growing use of electric devices signiﬁcantly alter

demand patterns.

Governance is also a key factor in forecasting activities.

A centralized forecasting approach, where a single

entity is responsible, often ensures greater reliability and

consistency across the system (IEA 2024).

System Services and Stability: Adapting

to High VRE Penetration

As VRE penetration increases, power systems must

address the reduced availability of conventional

synchronous generators, which have traditionally

provided essential services like inertia and frequency

regulation. This necessitates improving the capabilities

of conventional plants while enabling VRE generators to

contribute services such as active/reactive power control

and fault ride-through. Achieving this requires appropriate

technologies, updated regulations, and tailored contracts.

To ensure these services are consistently provided,

grid codes must be updated to deﬁne the technical

requirements for VRE contributions. In deregulated

markets, incentivizing these services through market

mechanisms can encourage power plant operators

to enhance their oerings, supporting overall

system stability.

5.1.5. Regulation and Regulatory

Incentives

Capital-Intensive Investments

and Social Considerations

Adapting public infrastructure to accommodate the

energy transition requires signiﬁcant capital-intensive

investments, which are classiﬁable as public goods.

Consequently, taxpayers must contribute, bringing

redistribution and equity issues to the forefront of

The Dynamics of Variable Renewable Energy Integration:

A Multi-Dimensional Framework for Future Power Systems

regulatory discussions. Economic regulation must reﬂect

shifts in social preferences and align with evolving policy

targets (Pollitt, Duma, and Covatariu 2024; Pollitt et al.

2024).

Rules and Technical Requirements

for VRE Integration

The integration of VRE into power grids has prompted

updates to grid codes, operating protocols and the

development of new services aimed at maintaining

system stability (IRENA 2019b). These updates reﬂect

modern planning approaches that address the increased

complexity and uncertainty inherent in long-term grid

planning. They also ensure compliance through robust

monitoring and enforcement mechanisms. The European

network codes developed by ENTSO-E15 are a good

example of this.

• Grid Codes and Operating Protocols: Grid

operators have revised grid codes to facilitate

smooth system operations. Updates include

connection requirements that ensure grid users

remain connected under various conditions and

enable resources to provide essential services.

Early updates focused on keeping VRE resources

online under a range of conditions to avoid

system imbalances.

• New Products for System Stability: As thermal power

plants retire and VRE penetration grows, new stability

services are being developed. These services can

be delivered by converter-based resources, demand-

side resources, and specialized assets. Balancing

enhanced grid code requirements with competitive

market mechanisms aims to maintain stability at

reasonable costs.

Eective imbalance settlement rules can further

encourage generators to provide more dispatchable

energy, such as through hybrid systems that integrate

storage. This approach enhances the reliability of energy

generation and supports the provision of ancillary

services critical for grid stability (Peng and Poudineh 2019;

for European example see CEER 2023; ENTSO-E 2022).

Addressing Market Misalignments: Capacity

Mechanisms and Price Incentives

Current market structures often result in “missing money”

(Newbery 2016) and “missing markets” (Newbery 2016;

Roques and Finon 2017; Keppler, Quemin, and Saguan

2022; Joskow 2021), creating an environment where RES

generators may not feel a strong responsibility to balance

their portfolios eectively. Without proper accountability,

the integration of renewable energy sources can become

challenging, undermining eorts to create a stable and

ecient energy system.

Various approaches have been implemented to address

the “missing money” problem in energy markets and

ensure sucient capacity to meet demand.

• Regulated Procurement: Capacity amounts and

prices are set by regulators.

• Energy Price Adders (such as scarcity pricing):

Incentivize resource availability during periods

of supply shortages. Scarcity pricing has been

successfully implemented in Texas and Australia.

• Capacity Remuneration Mechanisms (CRMs): These

mechanisms can eciently integrate VRE while

varying across jurisdictions. For a comprehensive

survey of CRM implementations, see Bublitz et al.

(2019).

System-Friendly Contracts and

Support Schemes for VRE

Support schemes, such as feed-in taris, feed-in

premiums, contracts for dierence (CfDs), and long-term

power purchase agreements (PPAs), reduce revenue risk

for VRE developers and encourage deployment. These

schemes can be designed to ensure that VRE assets are

operated in a manner that supports system stability. Ideally,

these contracts help hedge price risks without distorting

the economic merit order of asset dispatch, or creating

barriers to ﬂexible resources providing system services.

5.1.6. Energy Policy

Institutional Adaptations

Governments worldwide have become increasingly

engaged in long-term planning and procurement of

wind, solar, and energy storage technologies to meet

decarbonization commitments and ensure supply security.

This approach partially reinstates hierarchies dismantled

by sector liberalization, creating new contract-based

relationships between buyers and sellers through long-

term power purchase agreements (PPAs) (Joskow 2021).

According to the International Renewable Energy Agency

(IRENA 2019b, 2019a), at least 50 countries have adopted

competitive procurement programs involving long-term

The Dynamics of Variable Renewable Energy Integration:

A Multi-Dimensional Framework for Future Power Systems

PPAs to secure wind, solar, nuclear, green natural gas,

and storage capacities. These programs are essential for

achieving decarbonization and supply security goals.

The Case of India: Learning by Doing

India’s renewable energy (RE) journey exempliﬁes a

“learning by doing” approach, driven by evolving policies

and key enablers (Hasan and Bhatt 2022). Initially, self-

suciency was the primary policy objective, motivating

the promotion of RE. The Electricity Act of 2003 provided

a regulatory framework by mandating regulators to

set RE targets. Further, the establishment of the Solar

Energy Corporation of India (SECI) in 2011 supported

the implementation of the National Solar Mission

(NSM) and introduced payment guarantees, bolstering

investor conﬁdence.

India’s federal political structure, with powers devolved

to individual states, adopted a top-down approach

to RE promotion. The evolution from feed-in taris

(FITs) to competitive project selection reﬂects a

pragmatic response to technological maturity and

industry readiness. For example, storage technologies

were incorporated into policy frameworks in 2022,

demonstrating adaptability to emerging technologies.

Despite initial setbacks, such as the poor ﬁnancial

condition of state electricity boards, progress was

achieved through enhanced network regulation, including

open and inter-state access and hybrid solutions across

states. Priority dispatch mechanisms also facilitated RE

integration into the grid.

India’s success has hinged on setting long-term targets,

revising them in response to technological learning

curves, and adapting policies to reﬂect sector maturity.

This approach has proven eective in promoting

sustained growth in renewable energy.

Market Design and Policymaking

A stronger regional approach to market design and

policy making is essential for enhancing energy market

eciency. By leveraging interconnections, regions can

coordinate their eorts more eectively, thereby avoiding

regulatory loopholes that can hinder market eciency

and stability.

The Internal Energy Market in Europe illustrates the

challenges of misalignment between national and

European levels of coordination. Dierent modules

operate on varying time horizons, and the participants

involved in these modules often dier signiﬁcantly.

This fragmentation complicates synchronization eorts,

leading to inconsistencies in policy implementation and

market functionality (Peng and Poudineh 2019).

5.1.7. Market Design

Valuing Flexibility and Incorporating Curtailment

into Economic Dispatch and Business Models

Curtailment has traditionally been viewed as a symptom

of system inﬂexibility, particularly in systems with low

VRE penetration. High levels of VRE curtailment can

increase costs for both power systems and developers,

often due to factors such as delayed grid development or

insucient system ﬂexibility. To limit curtailment, several

measures can enhance ﬂexibility, including optimized

generation, storage, demand-side management, and

the use of compensation schemes and alternative

revenue streams.

Examples of such measures include Spain’s SRAP

system,16 Germany’s Use Instead of Curtail mechanism17

introduced in November 2023, and the EU’s curtailment

compensation mechanisms. These initiatives aim to

improve congestion management and provide ﬁnancial

incentives for the utilization of excess energy, thereby

reducing the economic burden of curtailment (IEA 2024).

Non-Firm Connection Contracts:

Expanding VRE Capacity

Non-ﬁrm connection contracts oer another strategy to

increase VRE capacity while reducing curtailment risks.

For example, starting in April 2025, the Netherlands

will permit contracts with large electricity consumers

that feature reduced taris in exchange for limited grid

access during periods of system stress. This innovative

approach balances grid stability with economic beneﬁts

for developers and consumers, mitigating the negative

impacts of curtailment.

Rethinking Curtailment at High VRE Penetration

At very high levels of VRE integration, particularly in

solar PV-heavy systems, pursuing zero curtailment may

not be economically viable. Instead, curtailment can be

utilized as a cost-ecient tool when no competitive use

for excess energy exists. The optimal level of curtailment

depends on factors such as system characteristics, VRE

resource availability, and the degree of ﬂexibility within

the system.

The Dynamics of Variable Renewable Energy Integration:

A Multi-Dimensional Framework for Future Power Systems

As VRE penetration increases, prolonged periods of

negative prices and curtailment become more frequent.

Addressing these challenges requires market reforms to

establish better price signals. Key measures include:

• Ensuring Seamless Integration of PPAs with Short-

Term Wholesale Markets: PPAs should incorporate

mechanisms that align with market dynamics, such as

ﬂexibility incentives.

• Capacity Remuneration Mechanisms (CRMs): These

can encourage the development of ﬂexible resources

and ensure system reliability.

• Contracts Prioritizing Flexibility over Generation:

New contractual frameworks should reward ﬂexibility

and system services, rather than focusing solely on

energy generation.

In fully decarbonized systems, PPAs must evolve to

incorporate mechanisms for managing curtailment

eciently, ensuring that market designs support the

system’s overall ﬂexibility and resilience (Newbery 2020).

5.2. Dierent

Implementation

Paths in Terms of

Time and Intensity

Depending

on the Power

System’s Archetype

5.2.1 Island and Quasi-Island Systems

Island and quasi-island systems face challenges in

maintaining short-term supply-demand balance and

frequency stability due to limited resources. To address

this, they prioritize enhancing conventional power plants

for faster output adjustments, increasing technical

standards for VRE plants, expanding demand response

programs, and utilizing technologies like battery

energy storage systems (BESS). Improved forecasting

of VRE output and net load is also key to managing

ﬂexibility needs.

5.2.2 Large Interconnected Systems

Large interconnected systems beneﬁt from diverse

resources, which enable them to manage variability

and ensure stability more eectively. Their strategies

include expanding interconnections to pool resources

and share ﬂexibility, coordinated procurement of ﬂexibility

services using conventional and VRE plants, demand

response, and BESS, utilizing market-based mechanisms

for ﬂexibility procurement, and employing advanced

forecasting techniques to optimize operations and

reduce uncertainties.

5.2.3 Meshed Power Systems

Meshed power systems, which are characterized by

multiple power ﬂow routes, focus on leveraging ﬂexibility

from various assets and enhancing grid management. Key

measures include redirecting power ﬂows through less

congested areas to optimize network usage, developing

advanced forecasting techniques, including forecasting

power ﬂows within the system, promoting competition in

ﬂexibility procurement, and reducing dispatch intervals to

increase responsiveness and eciency.

5.2.4 Sparsely Connected Systems

Sparsely connected systems, with fewer redundancies,

face higher risks of congestion and limited alternatives

for managing variability. These systems rely on VRE

curtailment to avoid congestion and may enhance

capacity through dynamic line rating (DLR) and auxiliary

services like voltage support.

5.2.5 Utility-Scale VRE Systems

Utility-scale VRE systems, with large, centralized solar

or wind plants far from demand centers, implement grid

reinforcement, interconnection redundancy, and power

ﬂow control to prevent congestion and curtailment. These

plants often provide system services like fault ride-

through and voltage support.

5.2.6 Distributed VRE Systems

Distributed VRE systems, characterized by many small

solar or wind plants, often near demand centers (e.g.,

rooftop solar), require system-side ﬂexibility solutions,

because the large volume of power-producing units of

various sizes and conﬁgurations makes it dicult to have

a comprehensive overview and control of the operation

of these power plants. Measures include ramping

capabilities at conventional plants, energy storage for

diurnal cycles, and reinforcing distribution grids.

The Dynamics of Variable Renewable Energy Integration:

A Multi-Dimensional Framework for Future Power Systems

5.3. The

Transformation

that Systems

Need at Very High

VRE Penetration

Levels: Rules,

Remuneration, and

Planning

As VRE integration progresses to higher phases, energy

systems require a strategic transformation. This involves

fundamental shifts in power system operation, planning,

and ﬁnancing, alongside adjustments to market designs.

Conventional generation will increasingly focus on

providing essential system services rather than energy

supply (IEA 2024). Scaling up VRE technologies with

robust regulatory support ensures alignment between

political, regulatory, and system objectives.

In 2023, countries such as Denmark, Ireland, Spain, and

Chile, along with states like Texas and South Australia,

generated over 30% of their annual electricity from

solar and wind. These systems achieved record levels

of variable renewable energy (VRE) penetration, with

renewable energy meeting the majority of power demand

for several hours at a time (IEA 2024).

5.3.1 Power System Planning

Proactive and robust planning approaches are critical for

managing uncertainties in power system development.

Integrated and coordinated planning allows for ﬂexibility

and periodic updates, accommodating evolving resource

costs, demand changes, and geopolitical realities.

Eective planning treats the power system holistically by

incorporating interactions with other sectors. Scenario-

based planning, sensitivity analysis, and stochastic

methods are essential for addressing uncertainties.

Stochastic approaches, in particular, enhance system

adequacy by balancing supply and demand while

considering the interactions between generation, grid,

and demand-side assets in an evolving energy landscape.

5.3.2 Remuneration and Prices

Key considerations for remuneration and pricing include:

• Fair Remuneration Mechanisms: Technologies should

be compensated based on the value of the system

services they provide, with transparent frameworks to

ensure a level playing ﬁeld for all service providers.

Targeted Support for Emerging Technologies:

Support schemes may be needed to accelerate the

deployment of emerging technologies.

• Corporate Remuneration Mechanisms: Ensuring that

corporate procurement strategies align with and

contribute positively to the energy transition.

5.3.3 Unlocking Demand Response from

Small-Scale Resources

Engaging demand-side resources is vital for enhancing

system ﬂexibility. Time-varying rates and enabling

technologies are critical for unlocking demand response

potential. Expanding time-varying rates to include network

charges creates additional incentives for consumers to

adjust electricity usage based on system conditions,

particularly in regions where network costs constitute a

signiﬁcant portion of electricity bills. This approach fosters

active participation from small-scale resources, improving

system balance.

5.3.4 Technology and Economics: An

Energy Mix Issue

VRE growth is occurring across diverse power systems

with dierent resource endowments. Denmark, Ireland,

Great Britain, and Morocco rely predominantly on

wind power, while China and Spain have a slight wind

dominance. Conversely, Chile, California, Vietnam, and

Australia rely more on solar energy (IEA 2024). This

demonstrates that dierent regions are successfully

integrating higher shares of VRE based on the

competitiveness of local renewable resources.

These experiences show that successful VRE integration

depends less on technological breakthroughs and

more on eective deployment of existing technologies

supported by robust regulatory frameworks and

market mechanisms.

The VRE generation in Denmark exceeds local demand

for extended periods, so signiﬁcant surpluses are created.

The country addresses VRE integration challenges

through extensive interconnections with neighboring

The Dynamics of Variable Renewable Energy Integration:

A Multi-Dimensional Framework for Future Power Systems

power systems, while also exploring storage, sector

coupling, and increasing solar PV to complement wind

power. South Australia, with limited interconnections,

manages surplus VRE generation through a combination

of energy exports, battery storage (BESS), demand

response, and curtailment, as solar PV’s impact on net

load is more pronounced in the region (IEA 2024).

Dealing with VRE surpluses at very high penetration

levels is primarily an economic challenge, as abundant

generation can lower electricity prices and threaten

the viability of new VRE projects. Systems with limited

interconnections are more vulnerable and must adopt

strategies like converting excess energy into low-

emissions fuels, using energy storage, and sector

coupling through electriﬁcation. Overbuilding VRE

capacity may also be viable if curtailment in some

seasons is economically feasible.

A holistic approach to planning and regulation is

critical, involving coordination across independent

power producers, demand-side resources, and system

operators. Additionally, collaboration between the power,

hydrogen, transport, and heating sectors will be crucial to

building an optimized, integrated energy system.

However, several unresolved challenges remain for

systems with very high VRE penetration. These include

managing seasonal variability, operating with high levels

of converter-based resources, ensuring investment

proﬁtability amid price volatility, and fairly compensating

assets that provide ﬂexibility. Continued innovation,

collaboration, and support from policymakers, technology

leaders, and researchers will be needed to address

these challenges.

The Dynamics of Variable Renewable Energy Integration:

A Multi-Dimensional Framework for Future Power Systems

6. Conclusion

The integration of VRE into modern power systems presents substantial

regulatory, market, and operational challenges. This paper has summarized

the challenges posed by integrating high shares of VRE, including

intermittency, low marginal costs, and locational dependencies, which

exacerbate existing market imperfections. To address these challenges, a

shift from the traditional focus on generation adequacy – prioritizing sucient

production capacity – to system adequacy, which prioritizes reliability and

resilience through ﬂexibility across all time scales, is needed (Keppler and

Saguan 2022).

A coordinated and multi-faceted approach is crucial,

encompassing policy adjustments, market redesign,

advanced power system planning, operational

adaptations, and signiﬁcant infrastructure investments.

Global experiences highlight a common set of solutions

progressively implemented to manage the growing

penetration of VRE, including: (i) optimizing dispatch to

improve resource utilization, (ii) enhancing forecasting

for demand and VRE generation, (iii) increasing system

ﬂexibility by retroﬁtting conventional plants and enhancing

VRE technologies, (iv) enabling industrial demand

response to better balance supply and demand, and (v)

upgrading grid infrastructure to accommodate higher

shares of VRE.

These measures, which are characterized by their

adaptability and cost-eectiveness, provide incremental

solutions that evolve alongside the changing supply and

demand dynamics in power systems. However, at higher

levels of VRE penetration, where renewables increasingly

shape system operations, fundamental transformations

become necessary. These transformations include

structural changes in system planning, market design, and

regulatory frameworks to maintain stability, reliability, and

cost-eectiveness (IEA 2024).9

The transition to VRE-dominated power systems requires

a paradigm shift in power system planning, operation and

ﬁnancing. This shift is underpinned by three critical pillars:

1. System Flexibility: Strengthening ﬂexibility through

infrastructure enhancements, supportive market

frameworks, and innovation is essential for minimizing

costly interventions for power system reliability.

This entails reshaping demand through responsive

pricing mechanisms and smart technologies, shifting

from a focus on meeting predictable demand with

dispatchable supply to actively managing both supply

and demand.

2. Market and Institutional Adjustments: As VRE

penetration rises, markets must adapt to include

ancillary services, capacity markets, and energy

storage, and therefore reﬂecting the true value of

ﬂexibility. These adjustments are crucial for sustaining

renewable energy investments and ensuring power

system reliability and adequacy.

3. Governance and Regulatory Frameworks: Centralized

forecasting and investment planning must align with

political and demand-side goals, ensuring power

system reliability and promoting an optimal energy

mix. Governance and regulatory frameworks should

be adaptable, transparent, and fair as technological

and market conditions evolve, with an emphasis on

equitable cost and beneﬁt distribution.

Moreover, a skilled workforce is critical to managing the

increasing complexity of high-VRE systems. Investing

The Dynamics of Variable Renewable Energy Integration:

A Multi-Dimensional Framework for Future Power Systems

in workforce development is essential to ensure the

technical capacity required to meet future demands.

In conclusion, the successful integration of VRE

requires a comprehensive and coordinated approach

across governance, market design, and infrastructure

development. Key success factors include:

• Governance and Power System Balancing:

Centralized governance aligned with evolving

grid codes and system services is essential for

addressing the unique needs of high-VRE systems.

• Phased Integration: Each phase of VRE penetration

demands distinct structural and operational

measures, progressively implemented to adapt to

increasing complexity.

• Policy and Market Frameworks: Policymakers must

design regulations that ensure long-term system

stability while fostering innovation and investment

in renewable technologies. Collaboration across

stakeholders is instrumental to overcoming technical,

institutional, and operational challenges.

Further research is necessary to address

coordination challenges, particularly within a

time-dynamic perspective.

The Dynamics of Variable Renewable Energy Integration:

A Multi-Dimensional Framework for Future Power Systems

Endnotes

1 In the literature, some studies have used zero-marginal cost technologies and zero (negligible) marginal generation

cost technologies interchangeably. However, all technologies aect the system, and their marginal cost to the sys-

tem is dierent than zero (Bigerna and Bollino 2016).

2 An incentive is deﬁned as “perceived beneﬁts that encourage certain behaviors” in the Glossary of Economics and

Personal Finance Terms by the Federal Reserve Bank of St. Louis (https://www.stlouisfed.org/education/glossary). In

this paper, we extend this deﬁnition as “perceived beneﬁts inﬂuencing agents’ behavior towards market transactions

and interactions with other agents.”

3 The initial search results ended up in 11,478 papers. To reﬁne the search, we limited the search on papers published

in energy economics and policy related peer-reviewed journalsrelated to energy economics and policy. Speciﬁcally,

we selected papers published in Applied Energy, Economics of Energy & Environmental Policy, Electricity Journal,

Energy, The Energy Journal, Energy Economics, Energy Policy, Energy Research & Social Science, Energy Strategy

Reviews, International Journal of Electric Power, Journal of Cleaner Production, Journal of Regulatory Economics,

The RAND Journal of Economics, Renewable and Sustainable Energy Reviews, Renewable Energy, Resource and

Energy Economics, Utilities Policy, and Wiley Interdisciplinary Reviews: Energy and Environment.

4 Text preprocessing involved tokenizing the text, removing both stopwords and punctuation, and lemmatizing

tokens to their base forms. The Term Frequency-Inverse Document Frequency (TF-IDF) method was employed for

vectorization, transforming the processed text into numerical data. The vectorizer was conﬁgured to exclude terms

that appeared in more than 95% of documents or fewer than two documents, resulting in a matrix suitable for topic

modeling. Subsequently, Gensim’s Latent Dirichlet Allocation (LDA) model was trained on the preprocessed and

vectorized data to extract underlying topics.

5 In current electricity market designs, there are multiple of prices such as day-ahead (market-clearing) price, intra-day

price, real-time (system marginal) price, etc. Theoretically, these prices should converge due to arbitrage in a friction-

less market.

6 While there is no a clear-cut time horizon deﬁning the dierence between the short-term and long-term, regulators

usually consider timeframe up to three years ahead of the real-time market as the short term, whereas timeframe

beyond three years is considered as the long term (ACER 2022).

7 No consensus on a deﬁnition of ﬂexibility has been reached in the literature (Impram, Varbak Nese, and Oral 2020),

so we follow ACER Guidelines and deﬁne ﬂexibility as the “ability of an electricity system to adjust to the variability

of generation and consumption patterns and grid availability across relevant market timeframes” (ACER 2024). The

literature categorizes ﬂexibility need into four dimension: power (short-term), energy (long-term), transfer capability

(short to medium-term), and voltage (very short-term) (Impram, Varbak Nese, and Oral 2020).

8 This issue occurs when a given economic model yields more than one possible equilibrium, each consistent with the

underlying assumptions and parameters of the model.

9 Please refer to Appendix 2 for a more detailed presentation of the six integration phases developed by IEA.

The Dynamics of Variable Renewable Energy Integration:

A Multi-Dimensional Framework for Future Power Systems

10 The ability of a power system to reliably and cost-eectively manage the variability and uncertainty of supply and

demand across all relevant timescales. Flexibility can extend across several timescales, i.e. from hourly changes in

supply – demand balance to seasonality eect of variability due to energy mix but also ﬁnal use of electricity (IEA

2019).

11 In 2023, IEA identiﬁed over 1,500 GW of renewable energy capacity at advanced development stages waiting in

connection queues globally (https://www.iea.org/reports/electricity-grids-and-secure-energy-transitions).

12 All systems at early stage of VRE penetration have implemented grid reinforcement and congestion management,

with 90% adopting power ﬂow control and enhanced interconnections to integrate more solar PV and wind (IEA

2024).

13 Around 75% of systems at early stage of VRE penetration have implemented measures to guide the location of new

VRE projects (IEA 2024).

14 All analyzed systems in the early stage of VRE penetration have implemented VRE forecasting, with 80%

also using net load forecasting and around 65%

considering power ﬂow forecasting in dispatch

decisions (IEA 2024).

15 ENTSO-E Network Codes: https://www.entsoe.eu/network_codes/.

16 Red Eléctrica, the Spanish Transmission System Operator, introduced in 2022 the Automatic Power Reduction

System (SRAP). This voluntary scheme is designed to solve congestion constraints by monitoring the conditions

closer to and in real time. If a contingency causing congestion occurs, the power output of participating plants can

be automatically reduced to 0 MW.

17 This scheme incentivizes consumers near VRE plants to use excess VRE supply by oering a ﬁxed discount on

wholesale electricity prices and an incentive in the form of no network charges or taxes. At the same time, this

scheme ensures economic eciency by capping compensation at the cost of alternative redispatching solutions.

The Dynamics of Variable Renewable Energy Integration:

A Multi-Dimensional Framework for Future Power Systems

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The Dynamics of Variable Renewable Energy Integration:

A Multi-Dimensional Framework for Future Power Systems

Appendix

Table A. Major themes in energy economics literature regarding VREs diusion.

Themes Sub-themes and keywords

Market structures and mechanisms

Market dynamics and price formation: Power price dynamics, volatility transmission,

market integration, marginal price, locational marginal pricing (LMP), scarcity price,

competitive market equilibrium.

Auction and bidding models: Uniform-price auction, multi-unit auctions, bidding,

strategic bidding behavior, market clearing procedure.

Market design and regulation: Centralized electricity market, electricity market

restructuring, bilateral and reserve market, peer-to-peer trading, virtual power plant

(VPP), trading platform, regulatory environment.

Decarbonization and energy

transition

Emission management and carbon markets: Carbon emission, carbon emission rights,

carbon trading, CO2 emission reduction.

Renewable energy integration: Expansion under environmental constraints, renewable

energy market integration, renewable energy certiﬁcate trading, quota obligation,

renewable energy transition.

Energy transition policies and incentives: Subsidy mechanism, feed-in tari, green

operation, clean energy generation, emission regulation.

Distributed and decentralized energy

resource

Microgrids and local energy systems: Residential microgrid, local energy planning,

isolated system, distributed renewable energy, microgrid, peer-to-peer transaction.

Prosumers and community-based energy models: Prosumer, peer-to-peer market,

community-based social marketing, renewable energy community.

Distributed energy management: Energy-management system, adaptive real-time

optimal dispatch, load curve, voltage instability prediction.

(Continued)

Appendix 1. Literature Review: Emerging

Themes and Sub-Themes

The Dynamics of Variable Renewable Energy Integration:

A Multi-Dimensional Framework for Future Power Systems

Themes Sub-themes and keywords

Energy storage and ﬂexibility

Storage systems and technologies: Battery, energy storage system, hybrid energy

storage system (HESS), latent energy storage, co-optimized generation and storage.

Flexibility services and grid management: Flexibility service, balancing reserves,

redispatch, reactive power planning.

Demand response and participation: Demand participation, active demand response,

demand side load management, peak shave.

Optimization and advanced analytics

Optimization methods and algorithms: Optimization, mixed-integer quadratic

programming (MIQP), stochastic optimization.

Forecasting and prediction models: ARIMA models, forecast, evaluation, net load

forecasting, time series aggregation, electricity market price prediction.

Machine learning and computational techniques: Bayesian optimization, hybrid

learning paradigm, support vector machine (SVM), deep learning, multi-agent simulation.

Policy and regulation

Market reform and impact evaluations: Market-oriented reform, deregulated energy

system, reform failures, policy eectiveness, market barriers.

Economic incentives and governance: Economic incentive, market power, subsidy

mechanism, competition.

Cross-border and regional analysis: Cross-border transmission investmentand

interzonal power exchange.

Technological innovations

Emerging energy technologies: Distributed generation sources, hybrid energy storage,

clean energy generation, renewable energy powered desalination.

Advanced grid operations: High-voltage direct-current (HVDC), smart thermal grids,

transmission expansion planning (TEP), adaptive wavelet neural network.

Innovation and technology maturity: Technology maturity, innovation resistance theory,

barriers detection, sustainable generation expansion planning.

Investment and economic analysis

Financial models and risk management: Financial bilateral contract, risk management,

real options, ﬁnancial policies, economic evaluation model.

Cost analysis and investment strategies: Levelized cost of electricity (LCOE),

investment structure, pricing incentive, internal rate of return, cost accounting.

Market transactions and trading mechanisms: Bilateral transaction, contract trade,

trading platform, emissions allowance.

Integrated power system operations

and planning

System operations and coordination: Power generation dispatch, optimal power ﬂow

program, system estimation, optimal coordinated scheduling, grid service.

Network management and optimization: Transmission switching integrated interval

robust chance-constrained (TSIRC), distribution locational marginal prices (DLMPs),

networked stackelberg competition.

Energy system integration: Integrated hybrid energy system, multi-area modeling,

cross-eciency, network expansion planning.

Table A. Continued.

The Dynamics of Variable Renewable Energy Integration:

A Multi-Dimensional Framework for Future Power Systems

Appendix 2. The IEA Six-Phase Framework

for VRE Integration for Wind and Solar

IEA has developed a six-phase framework for VRE integration (solar and wind) that outlines the progressive challenges

power systems face as VRE penetration increases. Each phase presents unique technical and operational obstacles

that must be addressed through targeted solutions to ensure the secure and cost-eective incorporation of VRE into

the power grid.

Phases 1 to 3, which are considered the low phases of VRE integration, experience relatively low impacts, with most

challenges addressable through straightforward modiﬁcations to existing assets or operational improvements.

• Phase 1: Insigniﬁcant System Impact

In Phase 1, the introduction of VRE is minimal, with negligible impacts on system operations. These eects are

typically localized, occurring mainly at grid connection points, and the system’s conventional operating parameters

remain largely unchanged. The dierence between load and net load is minor, and the overall system balance is

easily managed without signiﬁcant adjustments.

• Phase 2: Minor to Moderate System Impact

As more VRE is integrated, the system begins to experience noticeable dierences between load and net load,

increasing the need for ﬂexibility. Generators are required to ramp faster and more frequently. Operational

improvements, such as the incorporation of VRE forecasting into dispatch operations, become necessary to

maintain system stability. However, these challenges can often be managed through existing infrastructure and

minor operational modiﬁcations.

• Phase 3: The Operation Pattern of the Power System Driven by VRE

In Phase 3, VRE becomes a key determinant in the power system’s operational patterns, signiﬁcantly increasing

variability and uncertainty in net load. The system must now accommodate steeper and more prolonged ramping

periods, represented by the emergence of the “duck curve.” To address these challenges, the system requires

more comprehensive ﬂexibility measures that go beyond conventional assets, such as demand response and

enhanced grid management.

Phases 4 to 6 are considered high phases and mark increasing inﬂuence of VRE in shaping system operations,

requiring a fundamental transformation of the power system, including structural transformations in system planning,

market design, and regulatory frameworks.

• Phase 4: Almost All Demand Met by VRE at Times

In Phase 4, VRE can meet almost all of the electricity demand during certain periods, creating new challenges

in maintaining grid stability. Advanced operational solutions, such as fast frequency response and inertia

management, become critical to ensuring stability during high VRE generation periods. At this stage, regulatory

frameworks must evolve to support the increased reliance on intermittent renewable sources and the integration

of more ﬂexible resources, such as energy storage and enhanced interconnection.

• Phase 5: Signiﬁcant Volumes of Surplus VRE Across the Year

The Dynamics of Variable Renewable Energy Integration:

A Multi-Dimensional Framework for Future Power Systems

Phase 5 sees VRE generation exceeding local demand for extended periods, creating signiﬁcant surpluses. While

this is a technical achievement, it introduces economic challenges related to energy curtailment and market price

volatility. To address these issues, power systems must implement large-scale demand response, energy storage,

and sector coupling (e.g., converting excess VRE into hydrogen or other synthetic fuels). In addition, systems must

manage grid congestion and overbuilding VRE capacity to ensure economic viability.

• Phase 6: Electricity Supply Almost Exclusively

from VRE

At Phase 6, systems aim to meet extremely high shares of electricity demand with VRE. This presents

signiﬁcant challenges during periods of low VRE availability, such as extended cloudy or windless periods (e.g.,

“dunkelﬂaute”). To ensure reliability, long-duration energy storage and inter-regional electricity trade are essential.

The system must now operate with predominantly converter-connected resources, which require new approaches

to maintaining stability, such as advanced grid-forming inverters.

The Dynwamics of Variable Renewable Energy Integration: A Multi-Dimensional

Framework for Future Power Systems 41

Notes

The Dynwamics of Variable Renewable Energy Integration: A Multi-Dimensional

Framework for Future Power Systems 42

Notes

The Dynamics of Variable Renewable Energy Integration:

A Multi-Dimensional Framework for Future Power Systems

About the Authors

Selahattin Murat Sirin

Dr. Selahattin Murat Sirin is a Fellow at KAPSARC, specializing in regulation, business economics,

electricity markets, and sustainable energy. He holds a Ph.D. in Business Administration from Ivey

Business School at Western University, an M.P.A. in Public Administration from Harvard University,

an M.S. in European Studies from the Middle East Technical University.

Sandrine Wachon

Dr. Sandrine Wachon is a Visiting Researcher in the Utilities and Renewables Department at

KAPSARC, with extensive expertise in power sector reforms, regulation, and market design. Her

career began at RTE (Réseau de Transport d’Électricité), the French transmission system operator

(TSO), where she managed projects in Southeast Europe, including establishing Serbia’s TSO.

She later led international business development at EPEX SPOT, founding power exchanges in

Hungary and Serbia and contributing to the expansion fo the European internal power market.

Sandrine advised public authorities globally on power trading and ﬁnancial clearing solutions.

Since 2022, she has worked as an independent consultant, advising on impact investments in

energy and power market organization and design. Additionally, she lectures in environmental

economics at the University of Corsica and has previously taught at La Sorbonne. Sandrine holds a

Ph.D. in Economics from La Sorbonne, a degree in Vietnamese from Langues’O, and is an alumna

of the European Executive Programme at the École Nationale d’Administration.

Amro Elshurafa

Dr. Elshurafa is the Executive Director of the Utilities and Renewables Department at KAPSARC

and brings over 20 years of experience across three continents. His research interests include

renewable energy policy, electricity market design and regulation, and power systems modeling.

He has led and executed several national modeling initiatives at both distributed and utility

scales. Aspects of his research have been adopted by BP in their annual Statistical Review of

World Energy. Dr. Elshurafa is listed among the top 2% of scientists globally, according to Stanford

University, and serves as a board member of the Saudi Water and Electricity Regulatory Authority.

Credited with more than 50 papers and patents, he holds a Ph.D. in Engineering and an MBA

in Finance.

The Dynamics of Variable Renewable Energy Integration:

A Multi-Dimensional Framework for Future Power Systems

About the Project

This paper is part of the project “The Eect of a High Share of Renewable

Energy Technologies on Electricity Markets,” which explores the challenges

and opportunities associated with increasing renewable energy penetration.

This project aims to analyze dierent electricity market designs and assess

their eectiveness in integrating variable (intermittent) renewable energy

technologies, such as wind and solar power. By examining the economic,

technical, and regulatory implications of various market structures, the study

seeks to provide insights into eective mechanisms for managing electricity

systems under high shares of intermittent renewable energy.