Can an energy-only market fully remunerate investment? Empirical evidence since 2005

Abstract

The challenges of relying upon the Energy-Only Market (EOM) to remunerate power plants have been widely discussed. However virtually no empirical information is available showing what percentage of fixed costs have been recovered from the wholesale market alone in the European Union (EU). This paper presents the results of a detailed investigation into the cost recovery for thermal, nuclear, and renewable plants in France and Germany (representing 37% of the EU market) between 2005 and 2019. It shows that only second-generation nuclear plants recovered their full costs; the average level of cost recovery was 40% for combined-cycle gas turbines (CCGTs), 55% for coal plants, 30% for wind plants and 60% for utility-scale solar plants. As an alternative means of profitability determination the internal rate of return (IRR) was estimated. It was negative for CCGTs and wind plants; coal plants recorded a level of 2–3%, nuclear plants 7–8% and PV plants 0–2%, and should be compared with a typical utility cost of capital of 7%. The results are important for future market design and show that without changes, investment relying on the wholesale market alone in both renewable plants and dispatchable plants needed to accompany them will be difficult.