Europe’s electricity markets are changing. Historically, electricity markets were based on generation capacity with comparatively low fixed costs and high variable (fossil) fuel costs. But the ratio of variable and fixed costs is shifting, as renewable generation based on solar and wind with little to no variable cost increasingly enters the market.
Despite technological advances and efficiency gains, even the most modern, state-of-the-art fossil fuel capacity is finding it increasingly difficult to compete in a market where subsidised capacity is able to generate at zero variable cost. Yet firm capacity will be needed to back up variable generation. In this context, many argue the current market environment is no longer fit for purpose.
The penetration of low-carbon, intermittent, generation capacity is a positive step towards less carbon-intensive electricity systems. However, the change in generation portfolios does pose a number of challenges for the markets. How do we ensure that sufficient capacity is available when the wind doesn’t blow and the sun doesn’t shine? Currently subsidy schemes remove variable renewable capacity from market price signals. This cannot and should not be a long-term option – for any type of electricity generation.
This is no academic debate. Rather, the European electricity industry is already feeling the effects of the recent changes on the ground. Companies have to mothball recently built gas plants, for instance, or put investment projects on hold. The unfavourable market conditions are also discouraging external investors from putting their money into the electricity sector. Meanwhile, policy support costs, for instance for renewables or energy efficiency, are increasing the price that end customers pay for their electricity.
In short: the challenges are big and the solutions are as yet unclear. A fresh look at market design and at a ‘smarter’ energy system in general is needed. This book contributes to that discussion, with a particular focus on the effects for generators. In describing and analysing the current environment and the way that some of the challenges can be addressed, it addresses key concerns of the European and global electricity industry today.