TY - JOUR
T1 - Decreasing market value of variable renewables can be avoided by policy action
AU - Brown, T.
AU - Reichenberg, L.
N1 - Funding Information:
We thank Emil Dimanchev, Tommi Ekholm, Sabine Fuss, Jessica Jewell, Jonathan Koomey, Wolf-Peter Schill, Richard Schmalensee, Johannes Schmidt, Afzal Siddiqui, Patrik Söderholm, Thomas Sterner and Alexander Zerrahn for helpful discussions, suggestions and comments. T.B. acknowledges funding from the Helmholtz Association under grant no. VH-NG-1352 . The responsibility for the contents lies with the authors.
Publisher Copyright:
© 2021 The Authors
PY - 2021/8
Y1 - 2021/8
N2 - Although recent studies have shown that electricity systems with shares of wind and solar above 80% can be affordable, economists have raised concerns about market integration. Correlated generation from variable renewable sources depresses market prices, which can cause wind and solar to cannibalise their own revenues and prevent them from covering their costs from the market. This cannibalisation appears to set limits on the integration of wind and solar, and thus to contradict studies that show that high shares are cost effective. Here we show from theory and with simulation examples how market incentives interact with prices, revenue and costs for renewable electricity systems. The decline in average revenue seen in some recent literature is due to an implicit policy assumption that technologies are forced into the system, whether it be with subsidies or quotas. This decline is mathematically guaranteed regardless of whether the subsidised technology is variable or not. If instead the driving policy is a carbon dioxide cap or tax, wind and solar shares can rise without cannibalising their own market revenue, even at penetrations of wind and solar above 80%. The strong dependence of market value on the policy regime means that market value needs to be used with caution as a measure of market integration. Declining market value is not necessarily a sign of integration problems, but rather a result of policy choices.
AB - Although recent studies have shown that electricity systems with shares of wind and solar above 80% can be affordable, economists have raised concerns about market integration. Correlated generation from variable renewable sources depresses market prices, which can cause wind and solar to cannibalise their own revenues and prevent them from covering their costs from the market. This cannibalisation appears to set limits on the integration of wind and solar, and thus to contradict studies that show that high shares are cost effective. Here we show from theory and with simulation examples how market incentives interact with prices, revenue and costs for renewable electricity systems. The decline in average revenue seen in some recent literature is due to an implicit policy assumption that technologies are forced into the system, whether it be with subsidies or quotas. This decline is mathematically guaranteed regardless of whether the subsidised technology is variable or not. If instead the driving policy is a carbon dioxide cap or tax, wind and solar shares can rise without cannibalising their own market revenue, even at penetrations of wind and solar above 80%. The strong dependence of market value on the policy regime means that market value needs to be used with caution as a measure of market integration. Declining market value is not necessarily a sign of integration problems, but rather a result of policy choices.
KW - CO tax
KW - Feed-in premium
KW - Large-scale integration of renewable power generation
KW - Market value of variable renewables
KW - Merit order effect
KW - Renewable energy policy
UR - http://www.scopus.com/inward/record.url?scp=85107773354&partnerID=8YFLogxK
U2 - 10.1016/j.eneco.2021.105354
DO - 10.1016/j.eneco.2021.105354
M3 - Article
AN - SCOPUS:85107773354
SN - 0140-9883
VL - 100
JO - Energy Economics
JF - Energy Economics
M1 - 105354
ER -