Self-Reinforcing Electricity Price Dynamics under the Variable Market Premium Scheme

Ulrich J. Frey, Martin Klein, Kristina Nienhaus and Christoph Schimeczek
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Ulrich J. Frey: Department of Energy Systems Analysis, Institute of Engineering Thermodynamics, German Aerospace Center, Curiestrasse 4, 70563 Stuttgart, Germany
Kristina Nienhaus: Department of Energy Systems Analysis, Institute of Engineering Thermodynamics, German Aerospace Center, Curiestrasse 4, 70563 Stuttgart, Germany
Christoph Schimeczek: Department of Energy Systems Analysis, Institute of Engineering Thermodynamics, German Aerospace Center, Curiestrasse 4, 70563 Stuttgart, Germany

Energies, 2020, vol. 13, issue 20, 1-19

Abstract: We report a potential self-reinforcing design flaw in the variable market premium scheme that occurs if variable renewable energy power plants receiving a premium become price-setting in the market. A high share of renewable energy is a goal of many countries on their transformation path to a sustainable future. Accordingly, policies like feed-in tariffs have been in place for many years in many countries to support investment. To foster market alignment, variable market premia have been introduced in at least 12 European countries and a further dozen additional countries world-wide. We demonstrate both with a mathematical model and different scenarios of an agent-based simulation that the combination of variable premia and a high share of hours in which renewables are price-setting may lead to a self-reinforcing downward spiral of prices if unchecked. This is caused by the market premium opening up the bidding space towards negative prices. We discuss possible objections and countermeasures and evaluate the severity of this market design flaw.

Keywords: energy policy; market premia; price dynamics; renewable energy; agent-based simulation (search for similar items in EconPapers)
JEL-codes: Q Q0 Q4 Q40 Q41 Q42 Q43 Q47 Q48 Q49 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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