IDEAS home Printed from https://ideas.repec.org/p/enp/wpaper/eprg1711.html
   My bibliography  Save this paper

Market design for a high-renewables European electricity system

Author

Listed:
  • David Newbery

    (Energy Policy Research Group (EPRG) Judge Business School & Faculty of Economics Cambridge University)

  • Michael Pollitt

    (Energy Policy Research Group (EPRG) Judge Business School & Faculty of Economics Cambridge University)

  • Robert Ritz

    (Energy Policy Research Group (EPRG) Judge Business School & Faculty of Economics Cambridge University)

  • Wadim Strielkowski

    (Energy Policy Research Group (EPRG) Judge Business School & Faculty of Economics Cambridge University)

Abstract

This paper presents a set of policy recommendations for the market design of a future European electricity system characterized by a dominant share of intermittent renewable energy supply (RES), in line with the stated targets of European governments. We discuss the market failures that need to be addressed to accommodate RES in liberalized electricity markets, review the evolution of the EU's RES policy mechanisms, and summarize the key market impacts of RES to date. We then set out economic principles for market design and use these to develop our policy recommendations. Our analysis covers the value of interconnection and market integration, electricity storage, the design of RES support mechanisms, distributed generation and network tariffs, the pricing of electricity and flexibility as well as long-term contracting and risk management.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • David Newbery & Michael Pollitt & Robert Ritz & Wadim Strielkowski, 2017. "Market design for a high-renewables European electricity system," Working Papers EPRG 1711, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    • Handle: RePEc:enp:wpaper:eprg1711
    as

    Download full text from publisher

    File URL: https://www.jbs.cam.ac.uk/wp-content/uploads/2023/12/eprg-wp1711.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Ritz, Robert A., 2016. "How does renewables competition affect forward contracting in electricity markets?," Economics Letters, Elsevier, vol. 146(C), pages 135-139.
    2. Farmer, J. Doyne & Lafond, François, 2016. "How predictable is technological progress?," Research Policy, Elsevier, vol. 45(3), pages 647-665.
    3. Boffa, Federico & Pingali, Viswanath & Vannoni, Davide, 2010. "Increasing market interconnection: An analysis of the Italian electricity spot market," International Journal of Industrial Organization, Elsevier, vol. 28(3), pages 311-322, May.
    4. Würzburg, Klaas & Labandeira, Xavier & Linares, Pedro, 2013. "Renewable generation and electricity prices: Taking stock and new evidence for Germany and Austria," Energy Economics, Elsevier, vol. 40(S1), pages 159-171.
    5. Newbery, David, 2016. "Missing money and missing markets: Reliability, capacity auctions and interconnectors," Energy Policy, Elsevier, vol. 94(C), pages 401-410.
    6. Karsten Neuhoff & Stefan Bach & Jochen Diekmann & Martin Beznoska & Tarik El-Laboudy, 2013. "Distributional Effects of Energy Transition: Impacts of Renewable Electricity Support in Germany," Economics of Energy & Environmental Policy, International Association for Energy Economics, vol. 0(Number 1).
    7. Hirth, Lion & Ueckerdt, Falko & Edenhofer, Ottmar, 2015. "Integration costs revisited – An economic framework for wind and solar variability," Renewable Energy, Elsevier, vol. 74(C), pages 925-939.
    8. Strbac, Goran & Pollitt, Michael & Konstantinidis, Christos Vasilakos & Konstantelos, Ioannis & Moreno, Rodrigo & Newbery, David & Green, Richard, 2014. "Electricity transmission arrangements in Great Britain: Time for change?," Energy Policy, Elsevier, vol. 73(C), pages 298-311.
    9. Newbery, D. G., 2016. "A simple introduction to the economics of storage: shifting demand and supply over time and space," Cambridge Working Papers in Economics 1661, Faculty of Economics, University of Cambridge.
    10. Michael G. Pollitt and Karim L. Anaya, 2016. "Can current electricity markets cope with high shares of renewables? A comparison of approaches in Germany, the UK and the State of New York," The Energy Journal, International Association for Energy Economics, vol. 0(Bollino-M).
    11. Alessandro Clerici & Bruno Cova & Gabriele Callegari, 2015. "Decarbonization of the Electrical Power Sector in Europe: An Asset, An Opportunity or a Problem?," Energy & Environment, , vol. 26(1-2), pages 127-142, January.
    12. Richard Layard, 2015. "In brief... A Global Apollo Programme to tackle climate change," CentrePiece - The magazine for economic performance 444, Centre for Economic Performance, LSE.
    13. Diamond, Peter A & Mirrlees, James A, 1971. "Optimal Taxation and Public Production: I--Production Efficiency," American Economic Review, American Economic Association, vol. 61(1), pages 8-27, March.
    14. Michael G. Pollitt, 2017. "The economic consequences of Brexit: energy," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 33(suppl_1), pages 134-143.
    15. Jaffe, Adam B. & Newell, Richard G. & Stavins, Robert N., 2005. "A tale of two market failures: Technology and environmental policy," Ecological Economics, Elsevier, vol. 54(2-3), pages 164-174, August.
    16. Parsons, George R. & Hidrue, Michael K. & Kempton, Willett & Gardner, Meryl P., 2014. "Willingness to pay for vehicle-to-grid (V2G) electric vehicles and their contract terms," Energy Economics, Elsevier, vol. 42(C), pages 313-324.
    17. Hadsell, Lester & Shawky, Hany A., 2009. "Efficiency and Profit in the NYISO Transmission Congestion Contract Market," The Electricity Journal, Elsevier, vol. 22(9), pages 47-57, November.
    18. Severin Borenstein, 2012. "The Private and Public Economics of Renewable Electricity Generation," Journal of Economic Perspectives, American Economic Association, vol. 26(1), pages 67-92, Winter.
    19. Newbery, David, 2017. "Tales of two islands – Lessons for EU energy policy from electricity market reforms in Britain and Ireland," Energy Policy, Elsevier, vol. 105(C), pages 597-607.
    20. Gert Brunekreeft, Marius Buchmann, and Roland Meyer, 2016. "The Rise of Third Parties and the Fall of Incumbents Driven by Large-Scale Integration of Renewable Energies: The Case of Germany," The Energy Journal, International Association for Energy Economics, vol. 0(Bollino-M).
    21. Simona Bigerna, Carlo Andrea Bollino and Paolo Polinori, 2016. "Renewable Energy and Market Power in the Italian Electricity Market," The Energy Journal, International Association for Energy Economics, vol. 0(Bollino-M).
    22. Neuhoff, Karsten & Barquin, Julian & Bialek, Janusz W. & Boyd, Rodney & Dent, Chris J. & Echavarren, Francisco & Grau, Thilo & von Hirschhausen, Christian & Hobbs, Benjamin F. & Kunz, Friedrich & Nabe, 2013. "Renewable electric energy integration: Quantifying the value of design of markets for international transmission capacity," Energy Economics, Elsevier, vol. 40(C), pages 760-772.
    23. Pepermans, G. & Driesen, J. & Haeseldonckx, D. & Belmans, R. & D'haeseleer, W., 2005. "Distributed generation: definition, benefits and issues," Energy Policy, Elsevier, vol. 33(6), pages 787-798, April.
    24. Bishop, Justin D.K. & Axon, Colin J. & Bonilla, David & Banister, David, 2016. "Estimating the grid payments necessary to compensate additional costs to prospective electric vehicle owners who provide vehicle-to-grid ancillary services," Energy, Elsevier, vol. 94(C), pages 715-727.
    25. Haas, Reinhard & Panzer, Christian & Resch, Gustav & Ragwitz, Mario & Reece, Gemma & Held, Anne, 2011. "A historical review of promotion strategies for electricity from renewable energy sources in EU countries," Renewable and Sustainable Energy Reviews, Elsevier, vol. 15(2), pages 1003-1034, February.
    26. Newbery, David M., 2016. "Towards a green energy economy? The EU Energy Union’s transition to a low-carbon zero subsidy electricity system – Lessons from the UK’s Electricity Market Reform," Applied Energy, Elsevier, vol. 179(C), pages 1321-1330.
    27. Sidhu, A. & Pollitt, M. & Anaya, K., 2017. "A Social Cost Benefit Analysis of Grid-Scale Electrical Energy Storage Projects: Evaluating the Smarter Network Storage Project," Cambridge Working Papers in Economics 1722, Faculty of Economics, University of Cambridge.
    28. Gautam Gowrisankaran & Stanley S. Reynolds & Mario Samano, 2016. "Intermittency and the Value of Renewable Energy," Journal of Political Economy, University of Chicago Press, vol. 124(4), pages 1187-1234.
    29. Michael G. Pollitt, 2016. "Electricity Network Charging for Flexibility," Working Papers EPRG 1623, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    30. Barbour, Edward & Wilson, I.A. Grant & Radcliffe, Jonathan & Ding, Yulong & Li, Yongliang, 2016. "A review of pumped hydro energy storage development in significant international electricity markets," Renewable and Sustainable Energy Reviews, Elsevier, vol. 61(C), pages 421-432.
    31. Diamond, Peter A & Mirrlees, James A, 1971. "Optimal Taxation and Public Production II: Tax Rules," American Economic Review, American Economic Association, vol. 61(3), pages 261-278, June.
    32. Newbery, David & Strbac, Goran, 2016. "What is needed for battery electric vehicles to become socially cost competitive?," Economics of Transportation, Elsevier, vol. 5(C), pages 1-11.
    33. Cramton, Peter & Stoft, Steven, 2008. "Forward reliability markets: Less risk, less market power, more efficiency," Utilities Policy, Elsevier, vol. 16(3), pages 194-201, September.
    34. Mark A. Andor, Manuel Frondel, and Colin Vance, 2017. "Germanys Energiewende: A Tale of Increasing Costs and Decreasing Willingness-To-Pay," The Energy Journal, International Association for Energy Economics, vol. 0(KAPSARC S).
    35. Winkler, Jenny & Gaio, Alberto & Pfluger, Benjamin & Ragwitz, Mario, 2016. "Impact of renewables on electricity markets – Do support schemes matter?," Energy Policy, Elsevier, vol. 93(C), pages 157-167.
    36. Anaya, Karim L. & Pollitt, Michael G., 2015. "The role of distribution network operators in promoting cost-effective distributed generation: Lessons from the United States of America for Europe," Renewable and Sustainable Energy Reviews, Elsevier, vol. 51(C), pages 484-496.
    37. Hogan, William W, 1992. "Contract Networks for Electric Power Transmission," Journal of Regulatory Economics, Springer, vol. 4(3), pages 211-242, September.
    38. Alanne, Kari & Saari, Arto, 2006. "Distributed energy generation and sustainable development," Renewable and Sustainable Energy Reviews, Elsevier, vol. 10(6), pages 539-558, December.
    39. Unknown, 2016. "Energy for Sustainable Development," Conference Proceedings 253270, Guru Arjan Dev Institute of Development Studies (IDSAsr).
    40. Cossent, Rafael & Gómez, Tomás & Olmos, Luis, 2011. "Large-scale integration of renewable and distributed generation of electricity in Spain: Current situation and future needs," Energy Policy, Elsevier, vol. 39(12), pages 8078-8087.
    41. David M. Newbery, 1995. "Power Markets and Market Power," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 39-66.
    42. Denny, E. & Tuohy, A. & Meibom, P. & Keane, A. & Flynn, D. & Mullane, A. & O'Malley, M., 2010. "The impact of increased interconnection on electricity systems with large penetrations of wind generation: A case study of Ireland and Great Britain," Energy Policy, Elsevier, vol. 38(11), pages 6946-6954, November.
    43. Francisco Castellano Ruz & Michael G. Pollitt, 2016. "Overcoming barriers to electrical energy storage: Comparing California and Europe," Working Papers EPRG 1614, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    44. Simshauser, Paul, 2016. "Distribution network prices and solar PV: Resolving rate instability and wealth transfers through demand tariffs," Energy Economics, Elsevier, vol. 54(C), pages 108-122.
    45. Blaise Allaz & Jean-Luc Vila, 1993. "Cournot Competition, Forward Markets and Efficiency," Post-Print hal-00511806, HAL.
    46. Newbery, David & Strbac, Goran & Viehoff, Ivan, 2016. "The benefits of integrating European electricity markets," Energy Policy, Elsevier, vol. 94(C), pages 253-263.
    47. Spiecker, Stephan & Vogel, Philip & Weber, Christoph, 2013. "Evaluating interconnector investments in the north European electricity system considering fluctuating wind power penetration," Energy Economics, Elsevier, vol. 37(C), pages 114-127.
    48. Francisco Castellano Ruz & Michael G. Pollitt, 2016. "Overcoming Barriers to Electrical Energy Storage," Competition and Regulation in Network Industries, , vol. 17(2), pages 123-149, June.
    49. Gert Brunekreeft & Marius Buchmann & Roland Meyer, 2016. "The Rise of Third Parties and the Fall of Incumbents Driven by Large-Scale Integration of Renewable Energies: The Case of Germany," Bremen Energy Working Papers 0024, Bremen Energy Research.
    50. Ruggiero, Salvatore & Varho, Vilja & Rikkonen, Pasi, 2015. "Transition to distributed energy generation in Finland: Prospects and barriers," Energy Policy, Elsevier, vol. 86(C), pages 433-443.
    51. Böhringer, Christoph & Rutherford, Thomas F. & Tol, Richard S. J., 2009. "The EU 20/20/2020 Targets: An Overview of the EMF22 Assessment," Papers WP325, Economic and Social Research Institute (ESRI).
    52. William D. Nordhaus, 2014. "The Perils of the Learning Model for Modeling Endogenous Technological Change," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1).
    53. Georg Zachmann & Amma Serwaah & Michele Peruzzi, 2014. "When and how to support renewables? Letting the data speak," Working Papers 811, Bruegel.
    54. Rubin, Edward S. & Azevedo, Inês M.L. & Jaramillo, Paulina & Yeh, Sonia, 2015. "A review of learning rates for electricity supply technologies," Energy Policy, Elsevier, vol. 86(C), pages 198-218.
    55. Thomas Greve & Charalampos Patsios & Michael G. Pollitt & Phil Taylor, 2016. "Economic zones for future complex power systems," Working Papers EPRG 1625, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    56. Aaron Praktiknjo and Georg Erdmann, 2016. "Renewable Electricity and Backup Capacities: An (Un-) Resolvable Problem?," The Energy Journal, International Association for Energy Economics, vol. 0(Bollino-M).
    57. Georg Zachmann & Amma Serwaah & Michele Perruzi, "undated". "When & how to support renewables? Letting the data speak," SIMPATIC Working Papers 951, Bruegel.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ignacio Mauleón, 2020. "Economic Issues in Deep Low-Carbon Energy Systems," Energies, MDPI, vol. 13(16), pages 1-32, August.
    2. Bublitz, Andreas & Keles, Dogan & Zimmermann, Florian & Fraunholz, Christoph & Fichtner, Wolf, 2019. "A survey on electricity market design: Insights from theory and real-world implementations of capacity remuneration mechanisms," Energy Economics, Elsevier, vol. 80(C), pages 1059-1078.
    3. Simshauser, P., 2019. "On the impact of government-initiated CfD’s in Australia’s National Electricity Market," Cambridge Working Papers in Economics 1901, Faculty of Economics, University of Cambridge.
    4. Simshauser, Paul, 2022. "Rooftop solar PV and the peak load problem in the NEM's Queensland region," Energy Economics, Elsevier, vol. 109(C).
    5. Simshauser, P., 2020. "Merchant utilities and boundaries of the firm: vertical integration in energy-only markets," Cambridge Working Papers in Economics 2039, Faculty of Economics, University of Cambridge.
    6. Krishnamurthy, Chandra Kiran B. & Vesterberg, Mattias & Böök, Herman & Lindfors, Anders V. & Svento, Rauli, 2018. "Real-time pricing revisited: Demand flexibility in the presence of micro-generation," Energy Policy, Elsevier, vol. 123(C), pages 642-658.
    7. Newbery, David, 2018. "Evaluating the case for supporting renewable electricity," Energy Policy, Elsevier, vol. 120(C), pages 684-696.
    8. Hu, Jing & Harmsen, Robert & Crijns-Graus, Wina & Worrell, Ernst & van den Broek, Machteld, 2018. "Identifying barriers to large-scale integration of variable renewable electricity into the electricity market: A literature review of market design," Renewable and Sustainable Energy Reviews, Elsevier, vol. 81(P2), pages 2181-2195.
    9. Sijm, Jos & Lehmann, Paul & Chewpreecha, Unnada & Gawel, Erik & Mercure, Jean-Francois & Pollitt, Hector & Strunz, Sebastian, 2014. "EU climate and energy policy beyond 2020: Are additional targets and instruments for renewables economically reasonable?," UFZ Discussion Papers 3/2014, Helmholtz Centre for Environmental Research (UFZ), Division of Social Sciences (ÖKUS).
    10. Wolfgang Buchholz & Jonas Frank & Hans-Dieter Karl & Johannes Pfeiffer & Karen Pittel & Ursula Triebswetter & Jochen Habermann & Wolfgang Mauch & Thomas Staudacher, 2012. "Die Zukunft der Energiemärkte: Ökonomische Analyse und Bewertung von Potenzialen und Handlungsmöglichkeiten," ifo Forschungsberichte, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 57.
    11. Bublitz, Andreas & Keles, Dogan & Zimmermann, Florian & Fraunholz, Christoph & Fichtner, Wolf, 2018. "A survey on electricity market design: Insights from theory and real-world implementations of capacity remuneration mechanisms," Working Paper Series in Production and Energy 27, Karlsruhe Institute of Technology (KIT), Institute for Industrial Production (IIP).
    12. Sugimoto, Kota, 2021. "Ownership versus legal unbundling of electricity transmission network: Evidence from renewable energy investment in Germany," Energy Economics, Elsevier, vol. 99(C).
    13. René Aïd & Matteo Basei & Huyên Pham, 2017. "The coordination of centralised and distributed generation," Working Papers hal-01517165, HAL.
    14. Oliva H., Sebastian, 2017. "Residential energy efficiency and distributed generation - Natural partners or competition?," Renewable and Sustainable Energy Reviews, Elsevier, vol. 76(C), pages 932-940.
    15. Fabra, Natalia, 2021. "The energy transition: An industrial economics perspective," International Journal of Industrial Organization, Elsevier, vol. 79(C).
    16. Liu, Shuangquan & Yang, Qiang & Cai, Huaxiang & Yan, Minghui & Zhang, Maolin & Wu, Dianning & Xie, Mengfei, 2019. "Market reform of Yunnan electricity in southwestern China: Practice, challenges and implications," Renewable and Sustainable Energy Reviews, Elsevier, vol. 113(C), pages 1-1.
    17. Iychettira, Kaveri K. & Hakvoort, Rudi A. & Linares, Pedro & de Jeu, Rob, 2017. "Towards a comprehensive policy for electricity from renewable energy: Designing for social welfare," Applied Energy, Elsevier, vol. 187(C), pages 228-242.
    18. Simshauser, P., 2021. "Rooftop Solar PV and the Peak Load Problem in the NEM’s Queensland Region," Cambridge Working Papers in Economics 2180, Faculty of Economics, University of Cambridge.
    19. Ren'e Aid & Matteo Basei & Huy^en Pham, 2017. "A McKean-Vlasov approach to distributed electricity generation development," Papers 1705.01302, arXiv.org, revised Nov 2019.
    20. Wadim Strielkowski & Dalia Streimikiene & Alena Fomina & Elena Semenova, 2019. "Internet of Energy (IoE) and High-Renewables Electricity System Market Design," Energies, MDPI, vol. 12(24), pages 1-17, December.

    More about this item

    Keywords

    Electricity markets; wholesale market design; renewable energy; interconnection; electricity storage; long-term contracts; capacity markets;
    All these keywords.

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:enp:wpaper:eprg1711. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Ruth Newman (email available below). General contact details of provider: https://edirc.repec.org/data/jicamuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.