Abstract
We report a potential self-reinforcing design flaw in the variable market premium scheme that occurs if variable renewable energy power plants receiving a premium become price-setting in the market. A high share of renewable energy is a goal of many countries on their transformation path to a sustainable future. Accordingly, policies like feed-in tariffs have been in place for many years in many countries to support investment. To foster market alignment, variable market premia have been introduced in at least 12 European countries and a further dozen additional countries world-wide. We demonstrate both with a mathematical model and different scenarios of an agent-based simulation that the combination of variable premia and a high share of hours in which renewables are price-setting may lead to a self-reinforcing downward spiral of prices if unchecked. This is caused by the market premium opening up the bidding space towards negative prices. We discuss possible objections and countermeasures and evaluate the severity of this market design flaw.
Highlights
Variable renewable energies (VREs) have come a long way from exotic newcomers to essential building blocks of the energy systems of today
Apart from the high share of renewables, the scenario was deliberately generic reflecting typical characteristics of scenarios with high shares of renewables. It was not modelled for a certain year, since its purpose was to show that the price dynamics discussed will set in more realistic market settings with different technologies
That self-reinforcing deflationary price dynamics under the variable market premium scheme have been mathematically described and shown to be persistent in more realistic market simulations, one question emerges—is this effect of practical relevance? We identify three categories of objections: deflationary price dynamics will not occur in this form, since the effect
Summary
Variable renewable energies (VREs) have come a long way from exotic newcomers to essential building blocks of the energy systems of today. The central goal of these policies is usually to ensure refinancing of power plants generating electricity from renewable energy sources. Often, in their introductory phase, fixed feed-in tariffs have been successfully promoting renewables by significantly reducing investment risks. With fixed feed-in tariffs, renewable energy plant owners receive a fixed remuneration for each kWh of electricity fed into the grid. They have a proven track record enabling new renewable technologies to enter the market [7]
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