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Market distortions in flexibility markets caused by renewable subsidies – The case for side payments

Author

Listed:
  • Jonas Höckner
  • Simon Voswinkel
  • Christoph Weber

    (Chair for Management Sciences and Energy Economics, University of Duisburg-Essen (Campus Essen))

Abstract

Strongly increasing costs of congestion management have provoked a discussion in Europe about new approaches to solve grid congestions in a more efficient way. One approach is to design flexibility markets. In this paper we focus on the effects of subsidies for renewable energy on the market outcome of a flexibility market. We show that subsidies can cause market distortions and lead to an inefficient selection of flexibility options to solve grid congestions. We propose the implementation of side payments together with price caps and uniform pricing to achieve an efficient market design. Ultimately choosing between flexibility markets with and without side payments involves a tradeoff between minimizing system costs and maximizing renewable infeed. Our analysis provides the framework for a conscious political choice on that subject.

Suggested Citation

  • Jonas Höckner & Simon Voswinkel & Christoph Weber, "undated". "Market distortions in flexibility markets caused by renewable subsidies – The case for side payments," EWL Working Papers 1905, University of Duisburg-Essen, Chair for Management Science and Energy Economics.
    • Handle: RePEc:dui:wpaper:1905
    as

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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    congestion management; smart markets; flexibility markets; side payments; renewables;
    All these keywords.

    JEL classification:

    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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