According to a report on the website of the German newspaper Le Monde on October 17, EU energy ministers have reached an agreement on electricity market reform. The proposal aims to protect consumers from sharp price fluctuations such as those during the 2022 energy crisis, so that consumers and industrial companies can also benefit from cheaper electricity production. Marginal pricing in the
European electricity market is such that the most expensive generation technology determines the price of electricity. Since the conflict between Russia and Ukraine in 2022, the price of natural gas in Europe has constantly refreshed the historical record, which has led to a sharp rise in the wholesale price of electricity in European countries and reduced consumer welfare. However, limited by the existing market mechanism, renewable energy, despite its low marginal cost advantage, has not gained excess profits, but has reduced the investment incentives brought by electricity prices. Therefore, European electricity market designers are considering promoting the price decoupling between fossil fuel power generation and renewable energy, giving full play to the role of electricity price in guiding renewable energy investment while helping consumers to obtain cheaper clean energy.
Although gas-fired power generation accounts for less than 20% of total power generation in EU member States, gas-fired units are still the main determiner of market clearing price because they are the marginal units that balance the system and provide ancillary services most of the time. Although the average cost of power generation in European countries has decreased significantly in recent years due to the impact of new nuclear energy, renewable energy and hydropower, the soaring price of natural gas has led to a significant increase in the marginal cost and clearing price of the electricity market. As a result, uniform clearing pricing for all types of generation technologies is not sufficient to adequately reflect market information, and current market mechanisms may no longer be suitable for high-proportion renewable energy power systems.
Take the United Kingdom as an example, it implements Contract for Difference (CfD) for renewable energy at this stage. Contract for difference refers to a legal contract signed between a renewable energy generator and a "low-carbon contract company" (LCCC), in which both parties agree on a Strike Price in advance. During the term of the contract, LCCC will make "excess refund and deficiency compensation" to renewable energy power generators according to the Market Reference Price of the same period. When the market price is lower than execution price, LCCC will compensate the power generation enterprise for the difference; when the market price is higher than execution price, the power generation enterprise must pay the excess difference to LCCC, and the execution price is determined by "sealed bidding". Low-carbon power generators that meet the bidding conditions bid according to the expected revenue of different technical types of units, and rank them in the order of price from low to high. The lowest bidder wins the bid, and the winning price is the execution price of the unit. The bidding is conducted until the planned capacity of the round is met.
For renewable energy generators, CfD converts future market risks into fixed income, which is conducive to the recovery of investment, but targeted subsidies do not form a complete market incentive mechanism, renewable energy generators lack the enthusiasm to participate in the market, and the endogenous investment incentives of the market are insufficient; Moreover, the fixed contract period of 15 years will aggravate the risk of misprediction of the manufacturer's electricity price trend. For the market, CfD greatly promotes the development of renewable energy units, facilitates the achievement of carbon neutral targets, and ensures that consumers will not bear excessive electricity prices. But at the same time, the increase of renewable energy output has eroded the time and demand of traditional fossil energy generation, which may lead to the increase of price recovery investment of traditional units and further increase of electricity price. If traditional fossil fuel units fail due to losses, it will not only increase the risk of blackouts, but also increase the risk of price fluctuations. In the future, with the further increase of the penetration rate of renewable energy generation, its fixed price will be transmitted to the end users, resulting in a slower decline in electricity prices and a larger electricity expenditure.
Therefore, some experts believe that it is urgent to change the existing way of electricity market settlement. The new settlement method should play the role of different units in the power system. With the increasing penetration of renewable energy, the role of traditional fossil fuel units will change from providing electricity services to providing electricity services, mainly undertaking the tasks of demand response and system balance, while facing the pressure of recovering investment; the green value of renewable energy should also be reflected in the electricity price, thus forming a market-oriented investment incentive. In order to solve the above problems, relevant studies focus on the construction of renewable energy power generation market and traditional fossil energy power generation market respectively. One possible way to realize the
"dual electricity market" is to divide it according to the way of market settlement. Considering the characteristics of different units, they can be divided into "available" market (As available market) and "on demand" market (On demand market). According to the literal meaning, the "available" market refers to the resources that are limited by natural resources, such as wind and solar energy. Such units can only generate electricity when the wind and solar energy resources are available, and cannot actively respond to changes in demand unless they actively abandon wind and solar energy. The "on-demand" market includes units that respond to electricity demand, such as traditional fossil energy units such as coal and gas. Compared with CfD, the "on-demand" market and the "available" market are equivalent to two tracks for fossil energy and renewable energy according to their cost composition and operational characteristics, so that they can compete in their respective tracks without affecting each other. The two markets adopt different pricing methods, which can not only reflect the value of traditional fossil energy power services, but also reflect the value of renewable energy power services and green. The two electricity prices do not affect each other, so that the electricity price fully reflects the supply and demand information and releases the investment potential. Pricing in the "available" market will,
in principle, be based on levelized costs over the investment cycle, so that generators recover their investment and operating costs. In the short term, there are two main sources of income for units participating in the market: one comes from subsidies or other forms of subsidies (mainly for renewable energy units that have been invested and built to enjoy state subsidies), and the other comes from the market. At present, subsidies for renewable energy units are gradually declining, so the government can set a reference price for the "available" market according to the long-term marginal cost, and power generators can participate in the auction on the basis of the premium of the "available" price, which not only guarantees the rate of return, but also provides a way for subsidies to decline. Marginal cost-driven market-clearing prices are a typical feature of
"on-demand" markets, which can include fossil-fuel power plants, hydropower plants operating during peak load periods, demand response, and electricity storage (separate from renewables). These units can achieve effective scheduling in response to demand changes and meet different needs at different times. Because the marginal cost will also change when adjusting the power generation, the order of dispatch is from low to high according to the marginal cost, that is, "optimal dispatch". In a sense, this market will be a residual market, providing the power needed to balance supply and demand across the system. In the short term, there may be a shortage in the "on-demand" market, which will cause the market clearing price to be higher than marginal cost; in the long term, consumers will gradually improve their ability to manage their own demand, so as to minimize their dependence on the "on-demand" market. So, in the long run, the size of the "on-demand" market may shrink, but the transaction price may rise. Another possible design of
"dual electricity market" is to divide it according to the market cycle of participation. Due to the high volatility of renewable energy, it can be limited to participate in medium and long-term transactions, thus reducing the adverse impact of short-term fluctuations and playing a bottom-up role; while traditional fossil fuel units can rely on their flexibility to participate in spot and medium and long-term markets, still assuming the role of power balance. The settlement of electricity price can adopt the weighted calculation method, that is, the clearing price of renewable energy and traditional units is formed separately, while the clearing price of the whole market is the weighted price calculated according to the proportion of the two kinds of electricity generation.
No matter what kind of market segmentation and clearing settlement is adopted, it depends on its almost zero variable cost and low levelized cost, and the clearing price of renewable energy generation market will generally be lower. Combined with the carbon pricing mechanism, the settlement price may contain more environmental premium of renewable energy. The market of traditional fossil energy units is affected by the fluctuation of fuel price, and the price may be at a high level in the short term, and the volatility is also large. In the long run, according to the previous analysis, the scale of fossil energy market transactions may be reduced, at this time, more flexible and technologically advanced units participate in the market, which can quickly respond to demand in a short time. Correspondingly, the marginal cost will increase, so the clearing price may rise. But for consumers, if the two markets are divided, consumers can reasonably plan their own electricity consumption plan and purchase behavior according to their own electricity demand and preferences, so as to minimize electricity consumption expenditure and improve their welfare level.
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