Why fully liberalised electricity markets will fail to meet deep decarbonisation targets even with strong carbon pricing

Oscar Kraan, Gert Jan Kramer, Igor Nikolic, Emile Chappin, Vinzenz Koning

Research output: Contribution to journalArticleScientificpeer-review

7 Citations (Scopus)
88 Downloads (Pure)

Abstract

Full decarbonisation of the electricity system is one of the key elements to limit global warming. As this transition takes place, the electricity system must maintain system adequacy and remain affordable to consumers. In liberalised electricity markets investors are seen as key actors driving this transition. Due to the intermittent character of renewable assets, such as wind or solar parks, electricity systems with large shares of renewable electricity will need to become increasingly flexible. Evaluating whether specific market designs provide the right incentives to invest in flexibility, requires the simulation of realistic investor behaviour. Agent-based modelling provides the means to explore heterogeneous, imperfectly informed and boundedly rational investor behaviour within different electricity market designs. We evaluated two market designs; “energy-only” markets and markets with a Capacity Remuneration Mechanism (CRM). We conclude that energy-only markets, even with strong carbon pricing, do not incentivise investors to deliver a fully renewable, reliable and affordable energy system. Therefore policy makers should focus on developing CRMs which can work in combination with market incentives to reach a fully renewable, reliable and affordable electricity system in the second half of this century.

Original languageEnglish
Pages (from-to)99-110
Number of pages12
JournalEnergy Policy
Volume131
DOIs
Publication statusPublished - 2019

Keywords

  • Agent-based modelling
  • Electricity market design
  • Flexibility
  • Investor behaviour
  • Storage
  • Sustainability

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