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Impact of Contracts for Differences for non-carbon electricity generation on efficiency of electricity market

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  • Veenstra, Arjen T.
  • Mulder, Machiel

Abstract

In response to the recent energy crisis, the European Commission proposed two-way Contracts for Differences (CfDs) to secure renewable energy investments and protect consumers. The proposed CfDs, however, raised concerns regarding the potential impact on electricity prices. This study examines the effects of various CfD design elements on day-ahead electricity prices, welfare, and renewable energy production. Using a partial equilibrium model of an international electricity market including thirteen European countries, we find a trade-off between stimulating renewable electricity producers to respond to negative prices, and ensuring producer certainty. We also show potential market distortions for CfDs with longer-term reference prices, particularly when strike prices deviate from expectations. Additionally, our study underscores the interactions among various players in the electricity market, in particular storage operators and international traders, and how these interactions can mitigate potential distortions from CfDs. Therefore, policymakers should carefully consider the design elements of CfDs, and weigh the promotion of renewable energy production against the efficiency of markets. Moreover, a proper reference price should be selected, to avoid further increasing electricity prices in periods with high electricity prices.

Suggested Citation

  • Veenstra, Arjen T. & Mulder, Machiel, 2024. "Impact of Contracts for Differences for non-carbon electricity generation on efficiency of electricity market," Energy Economics, Elsevier, vol. 136(C).
    • Handle: RePEc:eee:eneeco:v:136:y:2024:i:c:s0140988324003827
    DOI: 10.1016/j.eneco.2024.107674
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    Cited by:

    1. Mats Kröger, 2024. "Cream-skimming through PPAs – Interactions between Private and Public Long-term Contracts for Renewable Energy," Discussion Papers of DIW Berlin 2092, DIW Berlin, German Institute for Economic Research.

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