Self-Reinforcing Electricity 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 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.

Keywords

• energy policy
• market premia
• price dynamics
• renewable energy
• agent-based simulation