How to organise future electricity systems with high shares of Renewable Energy Sources?

In October 2014, Clingendael International Research Programme (CIEP) published an essay titled “Reflections on coordination mechanisms for accommodating increasing amounts of wind and solar in the power market”. The aim of the essay is to discuss potential “coordination mechanisms”, focusing on policy and market tools to accommodate high shares of renewable energy in electricity generation. The starting point is the future European electricity system where 30-50% of the electricity demand is covered by variable renewable generation, i.e. wind and photovoltaics.

The authors argue that the need for new market coordination mechanisms arise from three observations. Firstly, the low variable cost of wind and photovoltaics result in a “merit-order” effect on wholesale electricity markets with lower prices pushing conventional power plants out of the market. However, declining electricity markets do not further facilitate the integration of renewable technologies without financial support. Secondly, remote and distributed sustainable renewable generation, e.g. offshore wind and distributed photovoltaics, pushes the network costs up. This is even  aggravated  by the variability of these generation sources, requiring long distance transport of power. Thirdly, as these variable generation only contribute to generation adequacy to a limited extent, reliability is expected to come at a higher cost.

The essay discusses policy measures and market mechanisms to alleviate these negative sector evolutions. First of all, the authors put forward that the best approach to stimulate sustainable generation technologies is probably the further improvement of the European Emission Trading Scheme. However, given the expected CO₂ price scenarios, it is not expected that the ETS mechanism will reach the renewable targets without other policy measures. Therefore, current production support mechanisms such as feed-in premiums and contracts of difference are put forward as acceptable solutions as they achieve a certain level of active market participation. More radical policy instruments such as emission performance standards, capacity remuneration mechanisms and regulated asset base are potential instruments but should be studied with large caution.

On how to deal with increasing network costs, firstly, a thorough review is put forward of the grid follows generation principle, i.e. that the network operators should facilitate generation capacity without discrimination. However, remote offshore grid development may require substantial network expansions which are not necessarily compensated by higher wind resources. Therefore, an integrated system approach is necessary. Secondly, the uptake of smart grid approaches are put forwards, increasing the flexibility space by electricity and gas system integration, demand response, and new operation concepts such as virtual power plants. This should be facilitated by markets which work closer to real time (for instance in real time markets in the USA), as well as stronger TSO-DSO cooperation.

It is stressed that today, no final conclusions is provided by academic literature on the need for capacity remuneration mechanisms to stabilize generation adequacy. It is suggested to proceed with caution, and that it might make sense to further improve the energy market and ancillary service market first. In last instance, the use of capacity remuneration mechanisms, or regulated asset based investment can be considered. This discussion is equally relevant for investments in storage facilities.

> More information: http://www.clingendaelenergy.com/publications/publication/reflections-on-coordination-mechanisms