DECARBONIZING THE ELECTRICITY SECTOR EFFICIENTLY REQUIRES A CHANGE OF MARKET-DESIGN

17-11-2021 -  Benoit PELUCHON

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Abstract

A 2050 carbon neutrality target is bound to become mandatory in the European Union. Since most low-carbon generation technologies have mainly fixed costs, and low or zero variable costs, wholesale electricity prices will be low most of the time, set by those variable costs, and high only during periods of scarcity. Thus, reaching carbon neutrality in 2050 (or before) in the electricity sector will lead to more volatile electricity prices. In an Energy-Only market, this implies that power plants’ gross margins will become more volatile. Using French load datas, we show that this increase in volatility yields a much higher cost of capital for generation capacity investment, with perfect competition. As a consequence, security of supply standards will not be met, and the costs of electricity for consumers will increase significantly. We also show that implementing long-term contracts allows to prevent this increase in financing cost. We conclude that a change of market design will be required to enable an efficient decarbonization of the electricity sector

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