Renewable energy sources and climate change mitigation

For reaching the 2 °C climate target, the robust growth of electricity generation from variable renewable energy sources (VRE) in the power sector is expected to continue. Accommodation of the power system to the variable, uncertain and locational-dependent outputs of VRE causes integration costs. Integrating VRE into a well-functioning electricity market can minimize integration costs and drive investments in VRE and complementary flexible resources. However, the electricity market in the European Union (EU), as currently designed, seems incapable to deliver this end. This paper aims to provide a comprehensive literature review of barriers to the large-scale market integration of VRE in the EU electricity market design. Based on the set-up of the EU electricity market, a framework was developed to incorporate the most pertinent market integration barriers and resulting market inefficiencies. This paper concludes that an overhaul is needed for the current EU electricity market to address all barriers identified. Firstly, a discrete auction intraday market, a marginal pricing balancing market, a two-price imbalance settlement and a nodal pricing locational marginal pricing mechanism seem more promising in limiting integration costs. Secondly, to support business cases of VRE and complementary flexible resources in the electricity market, a level playing field should be established and the price cap should be lifted up to the value of lost load (VOLL). Meanwhile, to fit VRE's market participation, a higher time resolution of trading products and later gate closure time in different submarkets would be required. Lastly, feed-in support schemes currently widely used for VRE investments might be inconsistent with market integration, as they increase integration costs and lock VRE investments in a subsidy-dependent pathway. To avoid such lock-in, further investigation of alternative capacity-based support schemes is recommended.

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Identifying barriers to large-scale integration of variable renewable electricity into the electricity market : A literature review of market design

One major avenue for policymakers to meet climate targets is by decarbonizing the power sector, one component of which is raising the share of renewable energy sources (renewables) in electricity generation. However, promoting renewables --in liberalized power markets-- creates a paradox in that successful penetration of renewables could fall victim to its own success. With the current market architecture, future deployment of renewable energy will necessarily be more costly and less scalable. Moreover, transition towards a full 100% renewable electricity sector is unattainable. Paradoxically, in order for renewable technologies to continue growing their market share, they need to co-exist with fossil fuel technologies. Ignoring these findings can slow adoption and increase the costs of deploying new renewable technologies. This paper spots the incompatibility between electricity liberalization and renewable policy, regardless of the country, location or renewable technologies. The Paradox holds as long as market clear prices with short term marginal costs, and renewable technology's marginal cost is close to zero and not dispatchable.

The renewable energy policy Paradox

The impact of wind power on electricity prices

Electricity prices, large-scale renewable integration, and policy implications

Italy promoted one of the most generous renewable support schemes worldwide which resulted in a high increase of solar power generation. We analyze the Italian day-ahead wholesale electricity market, finding empirical evidence of the merit-order effect. Over the period 2005-2013 an increase of 1 GWh in the hourly average of daily production from solar and wind sources has, on average, reduced wholesale electricity prices by respectively 2.3 €/MWh and 4.2 €/MWh and has amplified their volatility. The impact on prices has decreased over time in correspondence with the increase in solar and wind electricity production. We estimate that, over the period 2009-2013, solar production has generated higher monetary savings than wind production, mainly because the former is more prominent than the latter. However, in the solar case, monetary savings are not sufficient to compensate the cost of the related supporting schemes which are entirely internalized within end-user tariffs, causing a reduction of the consumer surplus, while the opposite occurs in the case of wind.

The Merit-Order Effect in the Italian Power Market: The Impact of Solar and Wind Generation on National Wholesale Electricity Prices

http://www.dt.mef.gov.it/export/sites/sitodt/modules/documenti_it/analisi_progammazione/working_papers/WP_N_9_-2014.pdf

Alessandra Cataldi

Papers

The Merit-Order Effect in the Italian Power Market: The Impact of Solar and Wind Generation on National Wholesale Electricity Prices

The merit-order effect in the Italian power market: The impact of solar and wind generation on national wholesale electricity prices