Clean Power

Published on June 26th, 2013 | by Giles Parkinson


Redesigning The Electricity Market For Wind And Solar

June 26th, 2013 by  

This article first appeared on RenewEconomy

Late last year, RenewEconomy wrote an analysis entitled the energy markets are broken. We were pilloried by some for exaggeration and being overly dramatic. But we simply drew on insight from the experts, and now they are quite open about the problem: the world’s energy markets do need to be redesigned, otherwise they cannot cope with the impact of wind and solar.

The International Energy Agency, in its recent special update of progress on climate policies, noted that liberalised energy markets (such as Australia’s) should be able to encourage a “significant decarbonisation” of the energy mix. The problem was that these markets – created to support incumbent, centralised fossil fuel generators, were not suited to deliver the sort of energy transformation that was needed to meet climate change targets.

Part of the problem is that the current “energy” markets are designed to allow baseload fossil fuel generation to trundle through at relatively low cost – but no environmental accounting. When demand rises, more expensive peaking plant generation is brought in, with prices rising for all generators. This has underpinned much of the revenues and profits for the incumbents.

(This problem is best illustrated in France, where the government actively encouraged households to consume more electricity to justify the massive investment in nuclear. Now that efficiency is becoming a focus as it approaches the time to replace that capacity, it is no longer looking like such a smart idea).

The introduction of renewables has complicated that equation for incumbents. Renewables have a very low marginal cost of operation, and deliver energy whenever they can. And because wind and solar have very low marginal costs of generation (i.e. they cost little to run once built) this has caused the wholesale price of electricity to fall. The concern in some countries – such as Germany, is that the price has fallen so far it may not provide sufficient incentive to invest in new capacity.

The owners of fossil fuel plants – coal, gas and nuclear – in Europe, America and Australia have complained about the impact on markets and returns from renewables. They have used this to argue that growth in renewables should be curtailed. But that is not the answer.  It just needs a new type of market. But not one that simply protects business as usual, but provides the right incentives to maintain an appropriate mix of plant as the world transforms to a clean energy system.

“Improving existing market designs and developing new ones for competitive power systems will be an essential feature of the transition towards a decarbonised world,” the IEA says. The solution is likely to be a move away from markets based only on megawatt hours bought and sold, and towards a system that recognises a combination of kilowatt hours consumed, capacity, dispatchability, and environmental credentials.

The issue was addressed in a recent presentation by Dr Patrick Graichen, from Agora Energiewende is a joint initiative of the Mercator Foundation and the European Climate Foundation. The issue has become a primary one in Germany, which has reached the point where fossil fuel plants are threatening to leave the market in greater numbers than planned. The market needs to be redesigned to provide them an incentive to stay. In other words, flexible coal and gas generation needs some sort of subsidy to support the growing penetration of renewables.

Graichen’s presentation is best represented by this series of graphs. The first identifies the problem. When there is little wind or solar, the market strikes a higher price because more expensive generation is required. When there is plenty of wind and solar, only the cheapest forms of fossil fuel generation gain access to the market. The price is significantly lower.


The second graph (below) illustrates some of the elements that Graichen says need to be considered in a new market design.

Remember, the Energiewende has a primary purpose of reducing its reliance on imports (almost all its gas, oil, uranium and hard coal is imported), it wants to be economically viable (low cost & high employment), and safe (no risk of nuclear accident and of climate change). It concludes that the only way to do this is through renewables and energy efficiency.


The next graph (below), illustrates the challenge of trying to integrate all the different markets in Europe, whether they have capacity markets in place, and the various renewable support schemes. This will be a big test for the EU, which will rely on an expanded grid to incorporate large amounts of renewables.


The last graph (below) is simply an explanation of the challenges involved. It’s most notable conclusion is that base load plants disappear, and only flexible generation remains. This is an aspect that appears to be not understood in Australian policy and regulatory circles, to the point where there is more risk that markets will be redesigned to support the incumbents at the expense of renewables, which is not the point at all. But such may be the power of the incumbents. But more of that another time.


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About the Author

is the founding editor of, an Australian-based website that provides news and analysis on cleantech, carbon, and climate issues. Giles is based in Sydney and is watching the (slow, but quickening) transformation of Australia's energy grid with great interest.

  • Dave2020

    Of course the “energy markets are broken”, but if anyone thinks they can be ‘mended’, they’re living in a fool’s paradise. The pretence that a ‘free market’ can function in a natural (sustainable, stable) monopoly is an idiot ideology.

    The solutions are technological and they will only be delivered by political will, informed by (unbiased) science.

    Standardisation is anathema to the market model, and yet:-

    “This situation demands new technology, so in both Japan and the US ideas are turning to floating structures for wind turbines.”

    “The JIP focuses on floater specific design issues:” No it doesn’t. It ignores the fundamental laws of physics, which dictate that any floating HAWT is a bad idea – inherently unstable and by far the most expensive design premise. Any idiot can see that even a 2MW turbine requires a huge (idle) substructure just to hold it up:-

    “It is now time to take the next step: standardisation.” These stupid design standards lock in high capex, (substructure and installation) expensive O&M, and high system operations costs, for life! (ok – only 25 years)

    I read a uniquely candid technical article on F1 suspension. In regard to the actual function of the anti-roll system the analysis confessed; “This is the opposite of what is required.” That will now apply to marine renewables.

    When engineers become wedded to a design paradigm they lose the ability to reason. It can take decades of flogging a dead horse, before the penny drops.

    R&D and IPR are at the heart of the matter. R&D is seen as a poor investment – lousy ROI – and the IP system is rotten to the core:-

    “There is almost as much money being spent defending and settling these troll cases as being spent in R&D – no kidding, it’s crazy.”

    • JamesWimberley

      Dave: where is the natural monopoly you see in eelctricity? Only the distribution grid. Agreed that should either nationalised or heavily regulated. But the problem raised in the OP is the market for production, which will be far less centralised than today. Don’t knock the people who are trying to fix a real and important problem.

      Somehow we have both to encourage cheap variable renewables (wind and PV), and ensure there is enough rarely-used but more expensive dispatchable capacity (geothermal, biomass, syngas, batteries) to cover peak demand. It’s still vital to keep the lights on.

      • Dave2020

        The district network operators are all monopolies (and raking in the profits). The Grid is a monopoly. OK, the power supply companies only enjoy an oligopoly, but they will never be subject to any market discipline. It’s just a silly game between them and the regulators.

        The ONLY way to fix the (AGW) problem (in time) is to force fossil fuel generators out of the ‘market’ and build the low carbon alternatives that can deliver enough dispatchable electricity to make the whole system work. Not by any stretch of the imagination can that be ‘designed’ as a ‘free market’.

        The so-called ‘markets’ we have are an entirely artificial construct, which will only ever have incentives and ‘signals’ that suit the players, otherwise they won’t play the game and they won’t invest.

        It’s primarily a (disruptive) technology problem. The incumbent industries and investors both run a mile from that stuff. SMEs try their best (Pelamis e.g.), but they’re on a hiding to nothing in any ‘market’ with big-money corporations calling the shots.

        My comments here elaborate:-

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