Market Distortions in Flexibility Markets Caused by Renewable Subsidies – The Case for Side Payments

HEMF Working Paper No. 05/2019

30 Pages Posted: 28 May 2019

See all articles by Jonas Höckner

Jonas Höckner

University of Duisburg-Essen

Simon Voswinkel

University of Duisburg-Essen - House of Energy Markets and Finance

Christoph Weber

University of Duisburg-Essen

Date Written: April 29, 2019

Abstract

Strongly increasing costs of congestion management have provoked a discussion in Europe about new approaches to solve grid congestions in a more efficient way. One approach is to design flexibility markets. In this paper we focus on the effects of subsidies for renewable energy on the market outcome of a flexibility market. We show that subsidies can cause market distortions and lead to an inefficient selection of flexibility options to solve grid congestions. We propose the implementation of side payments together with price caps and uniform pricing to achieve an efficient market design. Ultimately choosing between flexibility markets with and without side payments involves a tradeoff between minimizing system costs and maximizing renewable infeed. Our analysis provides the framework for a conscious political choice on that subject.

Keywords: congestion management, smart markets, flexibility markets, side payments, renewables,

JEL Classification: Q41, Q48

Suggested Citation

Höckner, Jonas and Voswinkel, Simon and Weber, Christoph, Market Distortions in Flexibility Markets Caused by Renewable Subsidies – The Case for Side Payments (April 29, 2019). HEMF Working Paper No. 05/2019. Available at SSRN: https://ssrn.com/abstract=3379900 or http://dx.doi.org/10.2139/ssrn.3379900

Jonas Höckner (Contact Author)

University of Duisburg-Essen ( email )

Universitätsstr. 2
Essen, 45141
Germany

Simon Voswinkel

University of Duisburg-Essen - House of Energy Markets and Finance ( email )

Universitätsstr. 2
Essen, NRW 45141
Germany

Christoph Weber

University of Duisburg-Essen ( email )

Universitätsstraße 2
Essen, 45141
Germany

HOME PAGE: http://www.ewl.wiwi.uni-due.de

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