Flexibility in Europe's power sector — An additional requirement or an automatic complement?

Abstract

By 2050, the European Union aims to reduce greenhouse gases by more than 80%. The EU member states have therefore declared to strongly increase the share of renewable energy sources (RES-E) in the next decades. Given a large deployment of wind and solar capacities, there are two major impacts on electricity systems: First, the electricity system must be flexible enough to cope with the volatile RES-E generation, i.e., ramp up supply or ramp down demand on short notice. Second, sufficient back-up capacities are needed during times with low feed-in from wind and solar capacities. This paper analyzes whether there is a need for additional incentive mechanisms for flexibility in electricity markets with a high share of renewables. For this purpose, we simulate the development of the European electricity markets up to the year 2050 using a linear investment and dispatch optimization model. Flexibility requirements are implemented in the model via ramping constraints and provision of balancing power. We found that an increase in fluctuating renewables has a tremendous impact on the volatility of the residual load and consequently on the flexibility requirements. However, any market design that incentivizes investments in least (total system) cost generation investment does not need additional incentives for flexibility. The main trigger for investing in flexible resources is the achievable full load hours and the need for backup capacity. In a competitive market, the cost-efficient technologies that are most likely to be installed, i.e., gas-fired power plants or flexible CCS plants, provide flexibility as a by-product. Under the condition of system adequacy, flexibility never poses a challenge in a cost-minimal capacity mix. Therefore, any market design incentivizing investments in efficient generation thus provides flexibility as an inevi complement.