Abstract
Public support for renewables has led to an unexpected investment momentum in Germany. A consequence is a reduction in wholesale electricity prices, the so-called merit order effect of renewables. We estimate this reduction using an econometric approach and provide a quantitative overview of the financial situation of conventional generators. Our results indicate that investments in new conventional capacities are economically unviable. With the current market design, this situation is going to impact supply security, at least in the long run. A popular approach to address this issue is the introduction of additional public support for conventional power plants. However, we believe that subsidizing renewable and conventional capacities contradicts the idea of a liberal market. We present two alternatives: State control of investments in renewables through auctions (as proposed by the European Commission), and a premium paid to representatives of the demand side (such as retailers) in dependence of their shares of renewables.
Highlights
Public support of renewable electricity normally aims at ensuring recovery of total cost plus a given return on investment
Our study presents estimates for the merit order effect to give a quantitative overview of the financial situation of power producers but it differs from most other studies in that we do not use a complex fundamental model of the electricity market but a simpler econometric approach
State aid in favor of renewable electricity generation has led to an unexpected investment momentum in many countries
Summary
Public support of renewable electricity normally aims at ensuring recovery of total cost plus a given return on investment. The squeezing out of gas-fired power generation by renewables reduces wholesale power prices which in turn has a negative impact on the profitability of conventional power plants. This effect is called the merit order effect of renewables. If governments were to accept such claims, both types of capacities (renewable and conventional) would end up being subsidized In our opinion, this is obviously a contradiction to the idea of liberal electricity markets. The second concept is a modified support scheme to representatives of the demand side in favor of renewables which accounts for overcapacities in the market for electricity generation.
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