Elsevier

Energy Policy

Volume 36, Issue 10, October 2008, Pages 3646-3661
Energy Policy

Pros and cons of exposing renewables to electricity market risks—A comparison of the market integration approaches in Germany, Spain, and the UK

https://doi.org/10.1016/j.enpol.2008.06.022Get rights and content

Abstract

The article examines how renewable electricity (RES-E) producers are integrated into the electricity market under the support legislations and regulatory frameworks of Germany, Spain, and the UK. Focus is on wind power, which faces the highest market integration challenge of all RES-E. The analysis shows that the three countries follow contrasting approaches of exposing RES-E producers to the market risks of forward electricity markets, balancing markets and system planning requirements. Risk exposure is highest in the UK and lowest in Germany. From a policy maker's perspective, there is a trade-off between a “high risk” and a “low risk” approach. When RES-E face high market risks, a higher level of financial support is required to stimulate RES-E development than in a low risk environment, but the exposure to market risks may also give an incentive to make efficient use of the respective market, thus limiting the indirect costs to society. The special characteristics of wind energy, however, put natural limits to the response of wind power plants to market prices and locational price signals and will increasingly influence electricity markets and grid infrastructure. These interdependencies should be recognised in the design of RES-E policies and market regulations.

Introduction

This article focuses on the interaction between support policies and electricity market designs. It examines how renewable electricity producers participate in the electricity markets of Germany, Spain, and the UK, and how these markets are influenced by renewable electricity (RES-E) integration, respectively. Based on this analysis, pros and cons of exposing renewable generators to market risks will be discussed.

Many policy analyses mainly compare RES-E support policies as such, especially focusing on the most common support instruments: feed-in tariffs and quota systems, to a lesser extent also tenders and financial incentives (e.g. Ragwitz et al., 2006, Ragwitz et al., 2007; Mitchell et al., 2006; Morthorst et al., 2005). Ragwitz et al. (2007) have analysed the effectiveness and efficiency of support instruments for RES-E in different European countries. They come to the conclusion that the success of RES-E support policies is strongly influenced by electricity-grid- and electricity-market-related barriers. In other words, the success of renewable energy deployment does not only depend on the design of the support policies but also on the electricity market design and the interaction of both fields of regulation.

In the political discussion about RES-E support schemes in Europe, the market integration and participation of RES-E is a controversial issue. Advocates of liberal market concepts favour “market-based” support schemes (usually meaning quota systems) to provide competition and least-cost RES-E (e.g. Eurelectric, 2003). Opponents argue that renewable energy support should not be market based as long as European electricity markets are not fully unbundled and competitive (e.g. EREC, 2005). It is important to recognise that the term “market” is used in an ambiguous way, sometimes referring to the support mechanism, sometimes referring to the electricity market participation. As a matter of fact RES-E always influence and in some way participate in electricity markets. We will discuss the way RES-E are involved in several types of electricity markets and identify the specific chances and challenges of market integration. This article will distinguish the participation in the following markets:

  • Forward electricity markets: Trade of RES-E ahead of delivery, via bilateral contracts or on the power exchange. We will focus on the day-ahead market. Since day-ahead market prices are a major benchmark for all forward trades, the day-ahead market is of special significance for electricity price assessments.

  • Balancing markets: Participation of RES-E in imbalance settlement and balancing services markets.

  • Support markets: Trade of RES-E on special tradable green certificate (TGC) markets, most relevant under a RE quota obligation. The most prominent example of a TGC market is the British Renewable Obligation Certificate (ROC) market. TGC markets have been analysed extensively, e.g. by Bertoldi and Huld (2006) and Midttun et al. (2005), and will only be shortly touched upon here.

While green certificate markets only trade the green value of energy, the other mentioned markets are submarkets of the power market that overlap and interact. A precondition for power market participation is the physical integration of RES-E into the electricity network. For this reason, aspects of grid access and system planning will also be considered.

The article will examine how renewables are integrated into these electricity submarkets operationally and economically under different RES-E support legislations and discuss the pros and cons of assigning market responsibilities and risks to RES-E generators.

Section 2 introduces general electricity market architecture and principles of power system operation. Section 3 summarises basic influences of RES-E deployment on those markets, independent of specific country cases or support schemes. Section 4 will examine the electricity market integration of RES-E in three countries, representing the three most prominent RES-E support schemes in Europe:

  • A fixed feed-in tariff scheme, represented by Germany's Renewable Energy Sources Act (“Erneuerbare-Energien-Gesetz”, EEG, 2004).

  • A feed-in premium scheme, represented by the “market option” in Spain's Real Decreto 661/2007 and formerly Real Decreto 436/2004.

  • A quota scheme, represented by the UK “Renewables Obligation” (RO, 2002).

For those three case studies, five questions will be analysed that reflect on the economic and operational integration of RES-E into the electricity markets:

  • 1.

    Economic integration into forward markets: How do forward electricity market prices affect the RES-E generator's revenues under these support schemes?

  • 2.

    Operational integration into forward markets: How is the renewable electricity integrated into the electricity market?

  • 3.

    Operational integration into balancing markets: Who is responsible for the forecasting and balancing of the RES-E production?

  • 4.

    Grid integration: What are the regulations for grid access and who pays for RES-E-related grid reinforcements?

  • 5.

    Effect of RES-E on electricity markets: What is the effect of RES-E on electricity market prices and is this effect relevant for RES-E producers?

Since wind energy, as fluctuating renewable energy source with—for the time being—the highest potential in Europe, poses the greatest integration challenge for electricity and balancing markets, the focus will be laid on the market impact of and on wind energy. It will be briefly discussed how applicable the results are to other renewable energy sources.

Section 5 will compare the market integration approaches of the three countries and discuss the pros and cons of exposing RES-E generators to specific market risks. This will be examined from two perspectives:

  • the implication for the RES-E generator and

  • the implication for overall societal costs.

Based on this discussion, conclusions and policy recommendation for the market integration of RES-E will be drawn (Section 6).

Section snippets

Introduction to power market architecture and basic principles of power system operation

This section gives a short overview of the basic power market architecture and operation.

Principle influence of RES-E on the dispatch of power plants and on spot market prices

Power plants are generally dispatched in such a way that the lowest possible costs of produced electricity are attained at each moment. Therefore power plants with the lowest variable production costs are put into operation first (Blok, 2006). There are practical deviations from this order, however, because fossil power plants (especially coal, lignite and nuclear) are limited in their operational flexibility. A certain share of the generation also has to be provided by synchronous generators

Electricity market integration of RES-E under different support schemes—the country cases Germany, Spain, and the UK

This section will examine how renewable electricity is economically and operationally integrated into the electricity markets of Germany, Spain, and the UK, focusing on the role of each country's main RES-E support policy in the integration process. The examined support policies represent the three predominant support schemes in Europe:

  • Feed-in tariffs (Germany)—RES-E generators sell their produced electricity at a legally regulated price per kWh to the electricity suppliers.

  • Feed-in premiums

Discussion: comparison of market integration approaches in the countries examined

Table 4, Table 5 summarise the research questions and results of the country case studies. It becomes clear that these countries follow contrasting approaches in allocating the responsibility for the power market integration of RES-E. The responsibilities are not only defined by the RES-E support scheme, but also by balancing regulations, grid code, and other market regulations.

This section will summarise the pros and cons of these market integration approaches and discuss under which

Conclusions

The analysis has shown that there are contrasting approaches for integrating RES-E into electricity markets. In Germany, the full responsibility for electricity sales, balancing and grid integration of RES-E is transferred to the TSO, and related costs are passed to consumers. In Spain, RES-E generators can choose between full and partial responsibility for market integration of their produced electricity. In the UK, RES-E generators are fully responsible. No matter what approach is chosen,

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    Parts of this article are based on findings of the research project “Fortentwicklung der EU-Politik zur Förderung der erneuerbaren Energien im europäischen Strombinnenmarkt” (FKZ 905 41 426) conducted for the German Federal Ministry for the Environment.

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