Self-reinforcing deflationary price dynamics under the variable market premium scheme

Abstract

We report a potential self-reinforcing design flaw in the variable market premium scheme that occurs if variable renewable energy (VRE) power plants receiving a premium become price-setting in the market. A high share (>60%) of renewable energies 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 further market alignment, variable market premia have been introduced. We demonstrate with an agent-based simulation model (AMIRIS) that the combination of variable premia and a high share of renewables in the market may lead to a downward spiral of prices if unchecked. Given current policy schemes, these results apply to at least 12 European countries and a dozen additional countries world-wide. Hence, we evaluate the severity of this market design flaw and discuss countermeasures.