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Renewable Electricity and Backup Capacities: An (Un-) Resolvable Problem?

Public support for renewables has led to an unexpected investment momentum in Germany. A consequence is a reduction in wholesale electricity prices, the so-called merit order effect of renewables. We estimate this reduction using an econometric approach and provide a quantitative overview of the financial situation of conventional generators. Our results indicate that investments in new conventional capacities are economically unviable. With the current market design, this situation is going to impact supply security, at least in the long run. A popular approach to address this issue is the introduction of additional public support for conventional power plants. However, we believe that subsidizing renewable and conventional capacities contradicts the idea of a liberal market. We present two alternatives: State control of investments in renewables through auctions (as proposed by the European Commission), and a premium paid to representatives of the demand side (such as retailers) in dependence of their shares of renewables.

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JEL Codes: Q42: Alternative Energy Sources, Q41: Energy: Demand and Supply; Prices, D44: Auctions, G31: Capital Budgeting; Fixed Investment and Inventory Studies; Capacity

Keywords: Renewables, Backup Capacity, Merit Order, Missing Money, Supply Security, Market Design, Germany

DOI: 10.5547/01956574.37.SI2.apra

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Published in Volume 37, Bollino-Madlener Special Issue of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.


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