Will the energy-only market collapse? On market dynamics in low-carbon electricity systems

• Published in: Renewable & sustainable energy reviews 2022-08, Vol.164, p.112594, Article 112594
• Main Authors: Thomaßen, Georg, Redl, Christian, Bruckner, Thomas
• Format: Article
• Language: English
• Subjects: Decarbonization; Demand response; Electrification; Energy-only market; Market design; Merit-order effect; Operating reserve demand curve; Storage
• ISSN: 1364-0321; 1879-0690
• DOI: 10.1016/j.rser.2022.112594

While the technical feasibility of power systems based on renewables has been established, there are concerns that a system with high shares of variable renewable electricity cannot be achieved through an energy-only market. At the root of these concerns is the merit order effect, which describes the price-depressing effect stemming from the deployment of wind and solar. More broadly speaking, this would imply a discrepancy between the way least-cost planning models select investments, and what investments are profitable in the energy-only market. The two perspectives align, however, quite well if meaningful pricing mechanisms for carbon emissions and involuntary load shedding are implemented. While meaningful carbon prices are largely sufficient to decarbonize the power system, achieving supply security through scarcity pricing requires careful market design, which fosters demand participation and storage investment, due to the threat of supply and price volatility. Both reduce volatility and induce a range of new price signals. These smooth out the price duration curve and, in turn, reduce risk in generation investments through more predictable prices. •+ Large literature review on price signals and bidding behavior in low-carbon power markets.•+ Energy-only market can be designed to remain fully functional.•+ Volatility is a greater threat to supply security than merit-order effect.•+ Price-volatility is the best business case for storage and demand participation.