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#Energy & Sustainability

Europe’s electricity market design: 2030 and beyond

  • December 10, 2018
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REPORT | Europe’s Electricity Market Design: 2030 and beyond

This CERRE Energy & Climate report analyses the possible evolution of the European electricity market under different levels of variable renewable energy penetration towards 2025.

The EU’s multiple efforts for decarbonisation with its long term strategy for a climate neutral economy by 2050, and the heated negotiations between the European Parliament, Council and Commission for a new market design highlight the many issues Europe is facing for defining the right electricity market. In this context, the authors of this new study have modelled and analysed the possible evolution of the electricity market under different variable renewable energy (VRE) penetration scenarios. They have looked at the necessary adaptation that these imply to the electricity market.

Overall, the report highlights the challenges for the current market design in moving towards self-financing VRE. It also observes a likely continuation of the difficulties faced by generators in financing their investments on the basis of wholesale power prices alone, with only some partial mitigation should commodity prices rise, as expected by the IEA, or with substantial improvements in interconnection across Europe.

“If the current market design is to deliver a decarbonised European electricity system, lower renewables costs and higher carbon prices will play a critical role,” said CERRE Academic Co-Director Michael Pollitt and CERRE Research Fellow Chi Kong Chyong, the authors of the report. “In the absence of these favourable conditions for VRE, long term subsidy mechanisms in the form of auctions would need to continue in order to meet European renewable electricity targets.”

The results of the modelling show the need for many of the existing fossil fuel power plants to remain on the system to support intermittent renewable electricity, hence the importance of the development of ancillary service markets. However, these markets are challenging to design, and the investments they support will likely have higher costs of capital given the volatile and difficult to predict income streams that they give rise to.

The report’s results also raise two central questions for the electricity market design:

  • Will a radical market redesign be necessary by 2025? Given that EU member states have accepted to live with largely subsidised new electricity generation from 2005 to 2018, this seems unlikely.
  • Will market designs converge across Europe? The issue is whether different local circumstances will cause continuing or increasing divergence in market arrangements. Ireland, Spain, the UK, Greece and Germany could have significantly different market configurations by 2025 given their different ability to absorb increased amounts of VRE.

Author(s)
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Kong Chyong
CERRE Research Fellow
Columbia University

Dr. Kong Chyong is an applied energy economist and policy analyst with a strong background and more than fifteen years of experience in applications of economics and operational research methods to energy and climate policy questions. Kong’s research interests include economics and geopolitics of Russian natural gas exports, with a focus on Russo-Ukrainian bilateral relations and impacts on Europe and global gas markets. He also works on large-scale modelling of power markets, with a focus on low-carbon generation sources and integration of renewables.

Currently, Kong is a Senior Research Scholar with the Center on Global Energy Policy at Columbia University. Prior to joining Columbia University, Kong was a research associate with the Energy Policy Research Group (EPRG) based at the Cambridge Judge Business School, University of Cambridge. Kong holds a PhD in Energy Economics and Policy (2011) and an MPhil in Technology Policy (2007) from the University of Cambridge. His PhD topic centered around Russia’s strategic natural gas export policy and Gazprom’s pipeline investment strategy.

Prior to his studies at Cambridge University, Kong was a researcher at the at the National Academy of Sciences in Ukraine.

Michael Pollitt
Michael Pollitt
CERRE Academic Co-Director
University of Cambridge

Michael Pollitt is Professor of Business Economics at the Judge Business School, University of Cambridge. He is an Assistant Director of the university’s Energy Policy Research Group (EPRG) and a Fellow and Director of Studies in Economics and Management at Sidney Sussex College, Cambridge. Michael is an elected Vice President (for Publications) of the International Association for Energy Economics (IAEE). He is a former external economic advisor to Ofgem.

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