Although renewable energy installations have low operating costs, they have to recoup their high up-front investment costs over the course of their lifetime. Moreover, their returns are highly weather-dependent. They generate a lot of electricity at times when it is windy and sunny. While good for the energy supply, this intermittently high supply forces prices down and makes it unattractive for producers to feed electricity into the grid at these times. The electricity supply is also affected if there is not enough sunshine or wind. Reserve capacity is needed to guarantee security of supply during “dunkelflautes”. The current electricity market does not yet fully reflect these specific characteristics of renewable electricity.

In view of the above, the Academies’ Project ESYS (Energy Systems of the Future) – a joint initiative of acatech, Leopoldina and the Union of the German Academies of Sciences and Humanities – investigated how these problems can be addressed through reforms of the existing market design. The working group was co-chaired by Jürgen Kühling (Chair for Public Law, Real Estate Law, Infrastructure Law and Information Law at the University of Regensburg) and Justus Haucap (Heinrich Heine University, Duesseldorf Institute for Competition Economics). Its findings have now been published in the ESYS Position Paper “Creating Investment Incentives, Providing Reserve Capacity: options for the market integration of renewable energy”. The experts conclude that, even during the current crisis, there is no fundamental question about the effective functioning of the electricity market. Major interventions in the market are thus unnecessary. Nevertheless, they argue that reforms to the electricity market design are needed in order to enable a rapid transition to 100% renewable energy.

Enabling flexibility

The inflexible nature of generating electricity from renewable sources is at the root of the investment problems in the energy system. Consequently, the experts argue that the electricity system must become more flexible. This requirement underpins all the other reforms and can only be fulfilled through a combination of technological innovations and economic incentives. For example, storage systems, flexible demand and flexible additional capacity can reduce the need for additional installations, grid infrastructure and reserve capacity. The digitalisation of the electricity system, for example the rollout of smart meters, is also key in this context.

Targeted use of market premiums and incentives to provide reserve capacity

Building on this flexibility, the ESYS experts go on to identify carbon pricing as the most effective and cost-efficient long-term mechanism for achieving climate neutrality by 2045. The carbon price should increase within a defined corridor and should be extended to as many sectors as possible. However, they do not believe that this instrument will be enough on its own to meet the 2030 targets for the expansion of renewables. In the short term, they argue that carbon pricing will need to be supplemented by market premiums. The Position Paper compares the opportunities and risks of fixed and sliding market premiums and of Contracts for Difference, providing policymakers with a basis for choosing the most appropriate market premium model.

It will be necessary to carefully assess whether the current strategic reserve system will be enough to meet future requirements. At present, the combination of an energy-only market and backup power plants is able to guarantee the availability of adequate reserves. The experts identify central or decentralised capacity markets as an alternative to this model. These could create new investment incentives, making the provision of reserve capacity more attractive to the market.

The German National Academy of Sciences Leopoldina, acatech – National Academy of Science and Engineering, and the Union of the German Academies of Sciences and Humanities provide policymakers and the public with independent, science-based advice on current issues of crucial importance for our future. The Academies’ members and other experts are leading researchers from Germany and abroad. Working in interdisciplinary working groups, they draft position papers that are published in the series of papers Schriftenreihe zur wissenschaftsbasierten Politikberatung (Monograph Series on Science-based Policy Advice) after being externally reviewed and approved by the Standing Committee of the German National Academy of Sciences Leopoldina.

The lead institution of the joint initiative “Energy Systems of the Future” (ESYS) is acatech. Within the Academies’ Project, over 160 energy experts from the science and research communities develop policy options for the implementation of a secure, affordable and sustainable energy supply.

Main contact:

Claire Stark, Press and Public Relations Officer
acatech – National Academy of Science and Engineering | “Energy Systems of the Future” Project Office
Tel.: +49 (0)89 5203 09-929
stark@acatech.de

Other contacts:

Caroline Wichmann, Head of Press and Public Relations
German National Academy of Sciences Leopoldina
Tel.: +49 (0)345 472 39-800
presse@leopoldina.org  

Dr. Annette Schaefgen, Head of Press and Public Relations
Union of the German Academies of Sciences and Humanities
Tel.: +49 (0)30 325 98 73-70
schaefgen@akademienunion-berlin.de