The Development of Renewable Energy in the Electricity Market

Abstract

Renewable energy sources (RES) play a crucial role in the decarbonisation of the electricity system. Their share in electricity production has grown significantly since 2005 and it is expected to grow further to reach over 70% of gross electricity generation in 2030. This development will change electricity market dynamics and increase the need for flexible power. The introduction of RES has so far been policy driven. Technology development has progressed thanks to massive public support to deployment. Different modes of support have been used, with various impacts on the market. We need to continue to move towards more market-based instruments in order to reduce both overall support costs and the distortive impact on the market, and in particular towards self-standing instruments such as power purchase agreements (PPAs). The key question is whether and when renewable technologies can become competitive in the electricity market. A complication is their cost structure, with close to zero marginal costs. Our analysis shows that their profitability depends on both the price level of energy commodities and the carbon price, and the flexibility of the electricity system to reduce the cannibalisation effect that renewables have on their own revenues. As renewables move to open merchant markets, we need to ensure adequate investments by introducing different forms of long-term contracts. Such contracts would contribute to stabilise market revenues of these investments, thereby benefiting both consumers and producers while ensuring market-based solutions.