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Political Economy of Safe-guarding Security of Supply with High Shares of Renewables: Review of Existing Research and Lessons from Germany
Department of Economics, Helmholtz Centre für Environmental Research – UFZ.
Department Ökonomie, Helmholtz- Zentrum für Umweltforschung − UFZ, Leipzig.
UFZ-Department Ökonomie.
Luleå University of Technology, Department of Business Administration, Technology and Social Sciences, Social Sciences.ORCID iD: 0000-0003-2264-7043
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2017 (English)Report (Refereed)
Abstract [en]

The increasing shares of wind power and solar PV in the European electricity markets have raised concerns about security of supply being jeopardized. The objective of this report is to synthesize the economic research on the nature and extent of intermittency problems in electricity markets, and not least discuss how to deal with these in the electricity market design. Particular attention is devoted to German experiences, and on identifying key lessons for Swedish market design.

Specifically, we first discuss how security of supply can be defined, and why real-world so-called energy-only markets, i.e., markets without any pricing of capacity

per se, may not provide an efficient level of security of supply. The latter includes a broad set of various market and policy failures. Furthermore, the report identifies and evaluates different regulatory options for addressing security of supply issues in the electricity system. These include three categories of options: measures to strengthen the energy-only market (e.g., removing price caps, strengthening the balancing market, etc.); the introduction of various forms of capacity mechanisms (i.e., focused, comprehensive, and decentralized capacity markets and strategic reserves); and various energy policy reforms (e.g., flexible renewable energy feed-in, improving demand-side management, adjusting network regulation, etc.).

Unlike many previous economic studies, we also analyze the drivers of the policy debate on security of supply in Germany, and not least the extent to which the knowledge gained through previous research has penetrated this debate. This political economy perspective permits better understanding of the rationale behind the actual outcomes of the policy processes, i.e., in Germany’s case a strengthening of the energy-only market and the installation of a strategic reserve.

A number of generic lessons from the German policy debate are highlighted: (a) all actors in the electricity supply system can in various ways contribute to security of supply; (b) underinvestment in security of supply most often have multiple causes, and should preferably be addressed through a portfolio of context-specific measures rather than through the use of single capacity mechanisms; (c) the energy transition taking place in, e.g., Germany, does not fundamentally question security of supply; (d) the measures implemented to safeguard security of supply should include an international perspective as well as consider the risks of potential institutional lock-in; and (e) the policy decision-making process needs to build on credible long-term commitments and transparent consultations with stakeholders.

In terms of lessons for the Swedish market design, our conclusions are in line with earlier studies arguing for a wait, see and evaluate strategy. We contend, though, that policy should abstain from making early, future commitments regarding the introduction of quantitative measures and more extended capacity mechanisms. Quantitative measures of security of supply are far from straightforward to define, monitor and evaluate; there is a risk that such measures become too constraining and leads to an exaggerated focus on security-of-supply. A portfolio of measures that strengthen the existing Swedish market design (e.g., removing price caps, reduced trading intervals etc.) should help address the causes of security of supply concerns in a more targeted and cost-effective manner.

Place, publisher, year, edition, pages
Stockholm: Energiforsk , 2017. , 81 p.
Series
Energiforsk Report, 2017:441
National Category
Social Sciences Economics
Research subject
Economics
Identifiers
URN: urn:nbn:se:ltu:diva-66271ISBN: 978-91-7673-441-4 (electronic)OAI: oai:DiVA.org:ltu-66271DiVA: diva2:1152756
Available from: 2017-10-26 Created: 2017-10-26 Last updated: 2017-11-02Bibliographically approved

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