Revisiting the Merit-Order Effect of Renewable Energy Sources
AbstractAn on-going debate in the energy economics and power market community has raised the question if energy-only power markets are increasingly failing due to growing in-feed shares from subsidized RES. The short answer to this is: no, they are not failing. Energy-based power markets are, however, facing several market distortions, namely from the gap between the electricity volume traded at spot markets versus the overall electricity consumption as well as the (wrong) regulatory assumption that variable RES generation, i.e., wind and PV, truly have zero marginal operation costs. We show that both effects overamplify the well-known merit-order effect of RES power in-feed beyond a level that is explainable by underlying physical realities, i.e., thermal power plants being willing to accept negative electricity prices to be able to stay online due to considerations of wear & tear and start-stop constraints. In this paper we analyze the impacts of wind and PV power in-feed on the spot market for a region that is already today experiencing significant FIT-subsidized RES power in-feed ($\approx$20%), the German-Austrian market zone of the EPEX. We show a comparison of the FIT-subsidized RES energy production volume to the spot market volume and the overall load demand. Furthermore, a spot market analysis based on the assumption that RES units have to feed-in with their assumed true marginal costs, i.e., operation, maintenance and balancing costs, is performed. Our analysis results show that, if the necessary regulatory adaptations are taken, i.e., increasing the spot market's share of overall load demand and using the true marginal costs of RES units in the merit-order, energy-based power markets can remain functional despite high RES power in-feed.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1307.0444.
Date of creation: Jul 2013
Date of revision: Feb 2014
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Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-07-05 (All new papers)
- NEP-ENE-2013-07-05 (Energy Economics)
- NEP-EUR-2013-07-05 (Microeconomic European Issues)
- NEP-REG-2013-07-05 (Regulation)
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