Designing Electricity Markets to Integrate Renewable Energy

About the Project

The goal of this project is to understand how policy can expedite renewable energy transitions in a cost-effective way, while allowing competitive national industries to develop. In line with this objective, a wide range of policy instruments, designed and implemented to promote renewable energy, are being assessed. Furthermore, the project takes a holistic approach by analyzing how the competitive dynamics between renewable technologies and incumbent technologies evolve. The workshop series, in line with KAPSARC’s overall mission, fits into the overall project by providing a space for dialogue, collaboration, feedback on current work, and setting future research directions.

Key Points

The penetration of renewable energy in deregulated electricity markets is changing the behavior of wholesale electricity prices. Liberalized electricity markets work well when the penetration of renewable energy is low, but they are disrupted when the penetration is significant. 

Renewable technologies have a cost structure that disrupts the traditional formation of wholesale electricity prices in liberalized markets — they have zero or near zero marginal costs. 

In Europe, the decline in electricity prices is due to the extent of renewable energy deployment. These lower prices are artificial as the true cost of electricity is much higher, especially once public subsidies are taken into account. 

The poor design of liberalized electricity markets is the cause of two inconsistencies: 

• Although renewable energy results in lower prices, this is not the result of a decline in long-run full-cycle costs. • The returns earned by renewable energy arise from the marginal costs set by fossil fuel technologies. Therefore, if fossil fuels were displaced from the market, current liberalized market rules would deny these returns. 

Policymakers and market participants are still searching for a ‘best’ design, which facilitates the integration of renewable energy into the power market — a fertile area for future research.