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Can wholesale electricity prices support “subsidy-free” generation investment in Europe?

Author

Listed:
  • Chyong, C.
  • Pollitt, M.
  • Cruise, R.

Abstract

Using a Pan-European electricity dispatch model we find that with higher variable renewable energy (VRE) production wholesale power prices may no longer serve as a long-run signal for generation investment in 2025. If wind and solar are to be self-financing by 2025 under the current European market design, they would need to be operating in circumstances which combine lower capital cost with higher fossil fuel and/or carbon prices. In the absence of these conditions, long term subsidy mechanisms would need to continue in order to meet European renewable electricity targets. More VRE production will exacerbate the ‘missing money’ problem for conventional generation. Thus, closures of unprofitable fossil fuel generation would sharpen and increase energy-only prices but would put more pressure on ancillary services markets to support system stability. Thus, the question of the need for a market redesign to let the market guide investments in both renewables and conventional generation would seem to remain.

Suggested Citation

  • Chyong, C. & Pollitt, M. & Cruise, R., 2019. "Can wholesale electricity prices support “subsidy-free” generation investment in Europe?," Cambridge Working Papers in Economics 1955, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:1955
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    References listed on IDEAS

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    Cited by:

    1. Michael G. Pollitt & Karim L. Anaya, 2021. "Competition in Markets for Ancillary Services? The Implications of Rising Distributed Generation," The Energy Journal, , vol. 42(1_suppl), pages 1-2, June.
    2. Chyong, Chi Kong & Newbery, David, 2022. "A unit commitment and economic dispatch model of the GB electricity market – Formulation and application to hydro pumped storage," Energy Policy, Elsevier, vol. 170(C).
    3. Ruhnau, Oliver, 2022. "How flexible electricity demand stabilizes wind and solar market values: The case of hydrogen electrolyzers," Applied Energy, Elsevier, vol. 307(C).
    4. Ruhnau, Oliver, 2020. "Market-based renewables: How flexible hydrogen electrolyzers stabilize wind and solar market values," EconStor Preprints 227075, ZBW - Leibniz Information Centre for Economics.

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    JEL classification:

    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • L98 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Government Policy
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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