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

Frey, Ulrich J and Klein, Martin and Nienhaus, Kristina and Schimeczek, Christoph (2020) Self-Reinforcing Electricity Price Dynamics under the Variable Market Premium Scheme. Energies. Multidisciplinary Digital Publishing Institute (MDPI). doi: 10.3390/en13205350. ISSN 1996-1073.

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Official URL: https://www.mdpi.com/1996-1073/13/20/5350


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.

Item URL in elib:https://elib.dlr.de/137060/
Document Type:Article
Title:Self-Reinforcing Electricity Price Dynamics under the Variable Market Premium Scheme
AuthorsInstitution or Email of AuthorsAuthor's ORCID iDORCID Put Code
Frey, Ulrich JUNSPECIFIEDhttps://orcid.org/0000-0002-9803-1336UNSPECIFIED
Klein, MartinUNSPECIFIEDhttps://orcid.org/0000-0001-7283-4707UNSPECIFIED
Nienhaus, KristinaUNSPECIFIEDhttps://orcid.org/0000-0003-4180-6767UNSPECIFIED
Schimeczek, ChristophUNSPECIFIEDhttps://orcid.org/0000-0002-0791-9365UNSPECIFIED
Journal or Publication Title:Energies
Refereed publication:Yes
Open Access:Yes
Gold Open Access:Yes
In ISI Web of Science:Yes
Publisher:Multidisciplinary Digital Publishing Institute (MDPI)
Keywords:market premia; price dynamics; renewable energy; agent-based simulation
HGF - Research field:Energy
HGF - Program:Technology, Innovation and Society
HGF - Program Themes:Renewable Energy and Material Resources for Sustainable Futures - Integrating at Different Scales
DLR - Research area:Energy
DLR - Program:E SY - Energy Systems Analysis
DLR - Research theme (Project):E - Systems Analysis and Technology Assessment (old)
Location: Stuttgart
Institutes and Institutions:Institute of Engineering Thermodynamics > Energy Systems Analysis
Deposited By: Frey, Ulrich
Deposited On:04 Dec 2020 14:32
Last Modified:25 Oct 2023 08:21

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