The electricity market may need to be overhauled to make the final push to net zero emissions, according new analysis from Aurora Energy Research.
Without reforms the wholesale market could eventually cease to function as renewables depress prices to such an extent it becomes unable to support investment in new low-carbon generation and storage.
The report says the current government target to reduce greenhouse gas emissions by 80 per cent of the 1990 level by 2050 could be achieved under the current market arrangements.
Aurora examined a scenario in which annual demand rises by 65 per cent to 530TWh due to the electrification of heat and transport. Accommodating this increase would require an additional 93GW of low-carbon generation on top of the 40GW already installed.
Prices on the wholesale market would become highly seasonal. They would crash during the summer, falling below £10/MWh for three quarters of hours. They would be much higher in the winter, averaging £60/MWh across the season.
Existing generation would continue to be profitable but would earn almost all of its revenues during the winter months. To be financially viable, new-build thermal generation would require a capacity payment of at least £40/kW and, in the absence of subsidies, new-build renewables would need to cut costs by 85 per cent on a per megawatt hour basis.
Batteries would play an increasingly important role, with more than 10GW of utility-scale storage installed by 2050.
Aurora said it is possible to completely decarbonise the power sector by 2050 with enough low-carbon generation and interseasonal storage.
But the dominance of renewables with extremely low marginal costs would collapse wholesale prices year-round, “raising questions about how low-carbon capacity and storage could be built economically under the current market structure.”
The report suggests several potential alternative designs, including the following:
- “Energy-only” market – Capacity auctions could be abolished, leaving the wholesale market to provide the revenues to fund both investment and operations. However, there would need to be a massive increase in the carbon price and price caps would have to be removed to enable generators to recover their costs.
- Long-run marginal cost pricing – Policies such as emissions limits could be used to force any remaining fossil generation off the system. This would allow renewable generators to sell power on the wholesale market on the basis of their long-run marginal costs, without being undercut by thermal generators.
- Equivalent firm capacity auctions – Intermittent renewables, perhaps combined with storage, could be allowed to compete against dispatchable generation in “equivalent firm capacity” auctions.
- Non-socialised capacity market – Suppliers could procure capacity directly from generators, with prices reflecting individual customers’ willingness to pay to avoid blackouts.
Aurora lead GB power expert Weijie Mak said: “The advent, and implications, of a near zero-carbon power sector have come to the forefront of policy debate in recent months with the publication of the Labour party’s energy policy paper and the IPCC report.
“Tripling Great Britain’s current low carbon generation capacity in a bid to reach ‘net zero’ in the power sector is possible, but also challenging.”
He continued: “The wholesale market will continue to function and provide the majority of revenues for existing assets, especially in winter months when wholesale prices are high.
“New assets will however, be increasingly reliant on capacity market payments for economic viability. To integrate a large buildout of renewables at minimal cost, regulators should aim for a harmonised policy across all technologies”.