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Renewable Electricity and Backup Capacities: An (Un-) Resolvable Problem?

Aaron Praktiknjo and Georg Erdmann

Year: 2016
Volume: Volume 37
Number: Bollino-Madlener Special Issue
DOI: 10.5547/01956574.37.SI2.apra
View Abstract

Public support for renewables has led to an unexpected investment momentum in Germany. A consequence is a reduction in wholesale electricity prices, the so-called merit order effect of renewables. We estimate this reduction using an econometric approach and provide a quantitative overview of the financial situation of conventional generators. Our results indicate that investments in new conventional capacities are economically unviable. With the current market design, this situation is going to impact supply security, at least in the long run. A popular approach to address this issue is the introduction of additional public support for conventional power plants. However, we believe that subsidizing renewable and conventional capacities contradicts the idea of a liberal market. We present two alternatives: State control of investments in renewables through auctions (as proposed by the European Commission), and a premium paid to representatives of the demand side (such as retailers) in dependence of their shares of renewables.

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