In the last post, we looked at how growing renewables capacity in Germany, in particular solar PV, could supress the investment signal for flexible thermal generation. This issue will not however be isolated to Germany. Market coupling and interconnection are making power markets in Europe increasingly interdependent. Germany’s size and location means it is becoming more influential in setting prices in northwest Europe as a whole. As the wholesale price in Germany is suppressed by the increasing deployment of renewables, prices in the surrounding markets will also be exposed to this downward pressure on prices. Therefore the signal for investment in thermal capacity in these markets will be weakened, just as in Germany. Furthermore markets where renewable projects are exposed to the wholesale price, for example those operating a green certificate system, will become less attractive to investors. Governments in these countries may need to introduce additional support mechanisms for renewables in order to generate the investment required to meet EU targets.
In conclusion, the inconsistency of ambition for renewables across the governments of northwest Europe and the different ways of subsidising these generation technologies is at odds with an increasingly unified market for electricity in the region. Germany’s aggressive stance on the sector, typified by its soaring solar PV capacity, may force change in the energy policy of surrounding markets. It may necessitate that support for renewable generation is given increasingly outside of the wholesale market, at the risk of further distorting the investment signal for thermal plant. Consequently, it may introduce the need for such intervention for thermal generation investment as well, both in these markets and in Germany, probably through a form of capacity payment.
Ultimately, the divergence of Germany’s energy policy from those of its neighbours may force Europe as a whole away from market-set prices, and onto a path where governments play a greater role in determining the future energy mix. This would lead to a world where a greater proportion of risk is born by the consumer rather than the market.
Posted by Edmund Phillips and Marc Daube on the 7th of February 2012
