Wind, solar could be self-financing by 2025 under current European electricity market design

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Large-scale solar and wind power projects may already be able to compete in Europe’s wholesale electricity market in 2025, according to the report “Europe’s Electricity Market Design – 2030 and beyond,” from the Centre on Regulation in Europe (CERRE), an independent think tank working in the field of network and digital industries’ regulation.

The authors of the study found that the two leading renewable energy technologies may become competitive enough for the spot market in Europe, if a series of favorable conditions materialize.

“… the available evidence and our own modelling show that, if wind and solar are to be self-financing by 2025 under the current European electricity market design, they would need to be operating in circumstances which combine much lower capital cost and/or much higher fossil fuel/carbon prices,” said CERRE Academic Director Michael Pollitt and Chi Kong Chyong, the authors of the report.

If this scenario does not unfold, auctions and tenders may still be needed in order to provide Europe with large volumes of renewable energy capacity, thus enabling the achievement of its RE targets. “However, we do find that wind, particularly offshore, is likely to suffer less from the cannibalization of its market than solar,” they added. The reason for this advantage for offshore wind is found, according to the report, in the technology’s ability to capture the average annual wholesale price of electricity.

Is a new market design necessary?

Wind and solar investors’ target rates of return are expected to rise, as both technologies move away from feed-in tariffs, while exposing them to higher price volatility, the report also notes. “The question of the need for a fundamental market redesign to let the market guide generation investments in both renewables and conventional generation investment would seem to remain,” the authors continue.

The creation of capacity markets or sharpening of ancillary services markets is seen as an option that could lead to higher costs of capital for new power plants, due to their volatile and difficult to predict income streams, the report said.

The CERRE analysts, however, warn that turnover from ancillary services may be volatile, as network operators may be pushed to minimize total ancillary services expenditure as part of their national incentive regulation, while wholesale electricity markets are becoming more interconnected across Europe and able to provide long price histories on which to base future projections.

But what could really help solar and wind solve most of their ‘financeability’ problems, the CERRE experts wrote, would be a sharp further drop in capital and O&M costs, the closing of more fossil fuel power plants, and an increase in carbon prices. “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 Pollitt and Kong Chyong.

They also concluded that a radical change of Europe electricity market design may not be necessary to ensure strong level of development for renewables, and that significant changes should be made mainly in the market for ancillary services, which are run by national system operators and are local to each system.