Self-Reinforcing Electricity Price Dynamics under the Variable Market Premium Scheme

Abstract

We report a potential self-reinforcing design flaw in the variable market premium scheme that occurs if variable renewable energy power plants receiving a premium become price-setting in the market. A high share of renewable energy is a goal of many countries on their transformation path to a sustainable future. Accordingly, policies like feed-in tariffs have been in place for many years in many countries to support investment. To foster market alignment, variable market premia have been introduced in at least 12 European countries and a further dozen additional countries world-wide. We demonstrate both with a mathematical model and different scenarios of an agent-based simulation that the combination of variable premia and a high share of hours in which renewables are price-setting may lead to a self-reinforcing downward spiral of prices if unchecked. This is caused by the market premium opening up the bidding space towards negative prices. We discuss possible objections and countermeasures and evaluate the severity of this market design flaw.

Profitability of Power-to-Heat-to-Power Storages in Scenarios With High Shares of Renewable Energy

“…We apply the open agent-based electricity market model AMIRIS [7] in order to simulate the German dayahead market. AMIRIS investigates market dynamics caused by the interactions of market actors, taking into account political frameworks [8,9] and actors' behavior under uncertainty [10,11]. For this purpose, agent-based modeling, which has its origins in artificial intelligence research, offers a powerful approach, since the actors with their perceptions and action patterns are at the center of modeling.…”

FAME-Io: Configuration tools for complex agent-based simulations

“…• the actors' perspective and their specific characteristics are taken into account (Frey et al, 2020;Kraan et al, 2018), and • models remain computationally feasible even in large-scale simulations (Hansen et al, 2019).…”

“…Specifically, FAME-Io has been used to integrate AMIRIS into multi-model workflows with automatic model configuration and result evaluation in the following projects: TradeRES 10 , ERAFlex II 11 , UNSEEN 12 , and VERMEER 13 . Hence, it has already been applied for various scientific publications (Frey et al, 2020;Nitsch et al, 2021;Safarazi et al, 2020).…”

AMIRIS: Agent-based Market model for the Investigation of Renewable and Integrated energy Systems

“…The market integration of PV-battery systems has been analysed by Klein (2020). Frey et al (2020) analysed market effects of the variable market premium on the electricity market.…”

“…Inter alia, the bidding decisions are based on the assessment of electricity market prices and generation forecasts (Nitsch, Deissenroth-Uhrig, et al, 2021), and diverse actors deciding on different time scales may be modelled. In particular, the agents' behavior does not only reflect marginal prices, but can also consider effects of support instruments like market premia, uncertainties and limited information, or market power (Frey et al, 2020). This allows assessing which policy or market design is best suited to an economic and effective energy system (Torralba-Díaz et al, 2020).…”