Yield losses in energy markets

The more wind and solar energy is used, the less yield they generate on energy markets. Mario Liebensteiner, professor of energy markets and energy systems analysis, explains why this is the case and how considerably higher CO2 prices could mitigate this effect.

Germany must cease to be dependent on fossil energy sources. The war in Ukraine has finally made it clear that this is not only necessary from an environmental point of view, but also as regards security policy. It is of little consequence whether Germany purchases the majority of its oil and gas from Russia as has been the case to date or from states in the Middle East as is the plan for the future. The aim of cutting harmful greenhouse gas emissions by over 50 percent by 2030 and reaching net zero by the year 2050 appears has never seemed more urgent.

The new Federal Government is continuing to mainly use subsidies for regenerative energy sources, above all for wind and solar power. “This is the logical approach, as Germany is not in a particularly privileged position when it comes to alternative sources such as hydropower or geothermal power, and gaining energy from sources such as biomass incurs far greater costs,” explains Mario Liebensteiner. Liebensteiner is a professor of energy markets and energy systems analysis at FAU and is a member of the project Future Energy Systems (ESYS), an initiative launched by the Academies of Sciences and Humanities for a more sustainable, secure and affordable energy supply.

Marginal costs is a concept from economics. In relation to energy production, it refers to the additional expenses incurred for increasing production. These additional costs are negligible for sun and wind, as more electricity can be produced during favorable weather conditions without incurring any additional fixed costs. Nuclear power plants also have fairly low marginal costs, unlike coal or gas power plants that require more fuel to boost production and also have to pay more for the greenhouse gases they emit.

Cannibalization effect with wind and solar power

If the CO2 tax is too low, then providers of wind and solar power have a problem: “The electricity exchange forces participants to base their offers on their marginal costs,” Liebensteiner explains. “The price on the electricity exchange is guided by the most cost-intensive power plant that is currently required for providing energy.” If a lot of energy is available from solar modules and wind turbines, then gas power plants are temporarily excluded from the market and the yield at the electricity exchanges crashes, even reaching negative values at certain times.

In other words, whenever there are favorable conditions, producers of solar and wind energy earn very little if anything at all over and above state subsidies. Liebensteiner speaks of a cannibalization effect of renewable energy. He has investigated several modeling scenarios to explore how best to tackle the problem. “The most effective measure is to impose considerably higher certificate prices for CO2 emissions,” he says. Although the price in the EU Emissions Trading System ETS has increased in the last four years, its current price of 80 euros per ton of CO2 is still too low. According to the economist’s calculations, taxes considerably in excess of 100 euros would be necessary to ensure that renewable energy could be produced with little or no state aid. Liebensteiner: “This would lead to fossil power plants being forced off the market, and renewable energies could remain on the market at a reasonable price.”

… good market conditions are more effective than subsidies that exclude alternative technologies.

A wider, more connected market

In an earlier study, Liebensteiner already showed that higher CO2 prices would help to decrease greenhouse gas emissions more effectively than subsidizing renewable energy. Great Britain introduced a CO2 tax in 2013 and has successively raised the price per ton to over 35 euros. Whilst Germany has only succeeded in moderately decreasing emissions from the electricity sector over the last eight years, the UK has managed to reduce emissions by over 50 percent. One decisive advantage of the British strategy according to the researcher is that a CO2 price sets a market-based incentive and does not dictate which technology should be preferred. “In my opinion, good market conditions are more effective than subsidies that exclude alternative technologies.”

Avoiding the cannibalization effect has limits, however: it can only work whilst fossil energy sources are still included in the electricity market. The CO2 price will no longer have any influence on the yield if requirements are covered by renewable energy alone. According to Mario Liebensteiner, Germany would then have to think about new controlling mechanisms, and about strengthening connections within the European electricity markets. “Peak yields and dark doldrums are closely linked by region and time. When the sun shines, it shines nearly everywhere at once, and differences in wind power tend to be minimal as well.” However, energy requirements and offers could be balanced out much more evenly on a European level, thereby attaining market prices that cover costs.

by Matthias Münch

In the current issue of alexander, you will find fascinating articles on yield losses in energy markets for renewable energies and why this is happening, on artificial tissue made of spider silk, on theater culture in the 17th century, on alternative ways of entering university, on the university hacking group FAUST and the Squirrels, an eSports group, as well as interviews with the new Vice President People Prof. Andreas Hirsch and the new FAU Ambassador Günther Weiss.