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Faculty of Economics

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Chyong, C., Pollitt, M., Cruise, R.

Can wholesale electricity prices support “subsidy-free” generation investment in Europe?


Abstract: Using a Pan-European electricity dispatch model we find that with higher variable renewable energy (VRE) production wholesale power prices may no longer serve as a long-run signal for generation investment in 2025. If wind and solar are to be self-financing by 2025 under the current European market design, they would need to be operating in circumstances which combine lower capital cost with higher fossil fuel and/or carbon prices. In the absence of these conditions, long term subsidy mechanisms would need to continue in order to meet European renewable electricity targets. More VRE production will exacerbate the ‘missing money’ problem for conventional generation. Thus, closures of unprofitable fossil fuel generation would sharpen and increase energy-only prices but would put more pressure on ancillary services markets to support system stability. Thus, the question of the need for a market redesign to let the market guide investments in both renewables and conventional generation would seem to remain.

Keywords: electricity market design, electricity regulation, wind energy, solar energy, electricity generation investment, ancillary services, capacity renumeration mechanisms, energy-only prices

JEL Codes: D47 L94 L98 L51 Q48 Q41 C61

Author links: Michael Pollitt  


EPRG Paper Link: 1919

Open Access Link: