DLR assesses suitability of support instruments to secure investments in future energy markets
- As part of the Horizon 2020 project TradeRES, the Institute of Networked Energy Systems analysed refinancing risks and support instruments that are intended to reduce the risks for investors and at the same time avoid overpayments by the subsidy providers.
- The market-based cost recovery of renewable energies depends highly on the future energy system. The design of risk-mitigating support instruments needs to also consider impacts on dispatch-behaviour.
- In order to give all stakeholders free access to a valuable tool for analysing possible design options for the transformation process, the open-source electricity market model AMIRIS was used for the work.
- Focus: Energy, Market design, Energy systems analysis
As part of the EU project TradeRES, researchers at the Institute of Networked Energy Systems have analysed how investments in renewable power generation plants such as wind or photovoltaic (PV) power plants can be made economically attractive through support instruments. To this end, various support instruments for a future energy system based entirely on renewable energies were assessed in scenario analyses. One finding: The market revenues for renewable energies depend strongly on the design of the future energy system, and refinancing without further support is uncertain. Therefore, funding instruments are required to reduce investment risks. Their design, however, must take into account effects on the actors’ market behaviour. The results have now been made publicly available on an interactive website to mark the end of the project.
Paradoxically, the fact that future energy markets will also require support mechanisms for power generation plants is based on their success: "Electricity generation with renewable energy sources has lower marginal costs than with fossil-fuelled power plants. This leads to the assumption that support instruments are no longer necessary," explains Dr. Christoph Schimeczek, TradeRES project manager at the Institute of Networked Energy Systems. "In fact, renewable electricity generation - especially in times of high solar irradiation or high wind supply - results in a low price on the electricity exchanges, which is even close to zero in some hours." This, however, means that hardly any return can be achieved on the revenue side - while the investment costs for wind farms or PV plants will remain considerable for the foreseeable future.
So how are investments in wind or solar power plants supposed to pay off? How can the necessary expansion be achieved if no sufficient return on investment appears to be achievable on the income side without support instruments? Against the background of these questions, the project team analysed refinancing risks and support instruments that reduce the risks for investors and at the same time avoid overpayments by the subsidy providers. These analyses were based on the open electricity market model AMIRIS developed at the DLR, which can be used to simulate the bidding behaviour of renewable energy providers on future electricity markets. At the same time, AMIRIS enables the creation of scenario analyses for wholesale electricity prices and the prospects for refinancing generation and flexibility technologies. The ability of AMIRIS to reproduce high-quality price time series has already been impressively demonstrated (DOI: 10.1109/ EEM60825.2024.10609021).
Specifically, as part of the TradeRES project, several energy system models developed at the institutions involved in the project were coupled with AMIRIS. This made it possible to analyse the effects of five different support mechanisms for renewable electricity generation plants such as wind and PV power plants in relation to electricity prices and other market-related indicators. The focus of the analysis was on Germany, with the modelling embedded in four pan-European scenarios. Each of these four scenarios considered an almost completely decarbonised electricity system, with the main differences being the price of hydrogen and the degree of demand flexibilisation. Another supplementary scenario depicted an intermediate step towards a fully decarbonised system.
The simulation results show that, due to higher capital expenditure, offshore wind and rooftop PV systems cannot be sufficiently refinanced in almost all scenarios without support instruments. However, effects of PV self-consumption were not analysed in depth. For wind onshore and utility-scale PV, on the other hand, there are sufficient refinancing rates via the electricity market in the scenarios with strong flexibilisation and higher hydrogen prices. However, due to remaining risks additional financial instruments are also required here to ensure investment incentives.
Here, Schimeczek points out the need for careful design: "Across the various funding instruments, it is recognisable that there can be incentives to curtail energy generation, which can also have a direct impact on the development of the market values of other technologies". This is the case, for example, due to differences in the design of clawback obligations. "The following applies to all technologies: The biggest differences in the economic prospects lie in the underlying scenarios. This is why we point out that an assessment of support instruments should always take into account the different characteristics of the respective energy system."
The analyses carried out in the project will now make it possible to simulate the effects of regulatory instruments on future market developments in detail. For stakeholders from industry and science as well as for political decision-makers, a basis has thus been created on which effective and efficient support instruments can be designed.