In a system with lots of renewable generation with zero fuel cost, the current market mechanisms for establishing price will cease to function.

Decarbonising the power sector will likely require improvements to existing market mechanisms regardless of the extent to which the rest of the economy is electrified. A European electrification strategy would provide an opportunity to tackle the necessary market changes in a structured and efficient manner.

Many renewable generation technologies require no fuel. As such, the nature of their costs is very different from conventional power plants. Wind parks, for example, have comparatively large upfront costs, but then produce electricity almost for free. Traditional market mechanisms are not designed with this cost structure in mind and this may create problems as the sector decarbonises. For example, the power market price reflects the costs of generating electricity, not the cost of building power plants in the first place. In a system with lots of low-cost generation, power prices are likely to be very low a lot of the time. These low prices may not, in themselves, be sufficient to encourage investments in generation capacity. Other mechanisms already exist in many countries to support investment and their importance is likely to grow as the sector decarbonises further. However, these changes and the associated challenges are the result of decarbonising generation and not the wider electrification of the economy. Indeed, the European Commission’s own analysis of scenarios to reduce emissions between 80-100% by 2050 shows that, regardless of the strategy chosen, the share of generation met by wind, solar and nuclear generation, all marked by high upfront costs and low generation costs, rises to between 77-87% of all generation by 2050. As such, market mechanisms will need to evolve regardless of the extent of electrification. A European electrification strategy would, however, provide a useful opportunity for Europe to meet these challenges in a more coordinated and efficient manner.

Reference:

European Commission, “IN-DEPTH ANALYSIS IN SUPPORT OF THE COMMISSION COMMUNICATION COM(2018) 773: A Clean Planet for All A European Long-Term Strategic Vision for a Prosperous, Modern, Competitive and Climate Neutral Economy,” fig. 23