Renewable Entry in Liberalized Electricity Markets: Implications for Policy Design

Abstract

Electricity generation from renewable energy sources is growing rapidly. This has resulted in lower wholesale electricity prices, but has also reduced the use of conventional generation technologies, such as coal and gas, because renewable energy generally has lower running costs. Declining demand, lower prices and lower utilisation rates have all reduced the profitability of conventional electricity generation. At the same time, flexible conventional technologies continue to play a very important role: the growing share of renewable energy sources like wind and solar energy, the output of which varies with weather conditions and from daytime to night time, requires flexible energy systems, including reliable back-up capacity, that can take the form of conventional generation, demand-response or storage, to ensure security of supply at all times.

Keywords: L51, L94

JEL Classification: Renewable Energy, Missing-Money Problem, Capacity Payments