The electricity markets will not do it alone – even where the full costs of (variable) renewables are lower than average market prices, policy intervention will be needed to ensure that sufficient investment is attracted to RES-E projects.
The cost reduction of wind and solar have allowed for a substantial reduction in the support that new installations receive. As the trend is expected to continue, it is frequently argued that support schemes for wind and solar should be phased out, as the technologies become cost competitive. However, policy measures will still be needed to ensure a robust investment framework for renewables, and several challenges need to be addressed through policy, power system and power market design.
Zero marginal costs technologies like wind and solar tend to bring down spot market prices at times of high wind or solar output. Furthermore, uncertainties about future revenues linked to policy, grid and carbon price developments are high and complicate the financing context for RES-E investments. As the shares of wind and solar are growing, their ability to recover investments only on the basis of revenues from short-term energy-sales is undermined. Therefore, even where the full costs of (variable) renewables are lower than average market prices, policy intervention will be needed to ensure that sufficient investment is attracted to RES-E projects
The EU ETS needs to be improved. The current low carbon price under the EU ETS and continued failure to price other externalities does not provide a level playing field for technologies with quite different environmental impacts and maturity levels.
Uncertainties of carbon prices and electricity markets more broadly result in a risk premium for capital costs, which in particular impacts wind and solar as they face the highest share of capital costs in total costs. Remuneration schemes or other policy measures are needed to ensure that investments in RES-E project can be made at reasonable capital costs.
The current electricity market designs and grid codes were tailored for conventional power stations with dispatchable generation. They should be modified to recognize the growing penetration and operational needs of variable renewables.