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From Model Optimality to Market Reality: Do Electricity Markets Support Renewable Investments?

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  • Abuzayed, A.

Abstract

This study investigates the future market values of photovoltaics and wind energy in Germany to assess their economic profitability without financial interventions. Using an open-source optimization model benchmarked against 2019–2024 data, we model the wholesale electricity market under the official expansion scenarios with projected carbon and gas price trajectories. Results show that despite higher wholesale electricity prices compared to pre-crisis levels, low capture prices, particularly for photovoltaics, may deter its future profitability. Contrary to that, onshore wind achieves higher capture prices, suggesting greater potential for self-financing under higher carbon and gas prices. However, market dynamics still pose risks, including price cannibalization and infra-marginal effects during generation oversupply periods. Policy interventions, including market design reforms and long-term instruments are critical to ensure stable revenues and align market conditions with renewable energy expansion goals.

Suggested Citation

  • Abuzayed, A., 2025. "From Model Optimality to Market Reality: Do Electricity Markets Support Renewable Investments?," Cambridge Working Papers in Economics 2558, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:2558
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    JEL classification:

    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q47 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy Forecasting

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