Energy Market Design for a Net-Zero Emissions World

Institutes Working on the Project

Chair of Economic Theory, Friedrich-Alexander-Universität Erlangen-Nürnberg

Ludwig Erhard ifo Center for Social Market Economy and Institutional Economics

Tasks

The transformation towards a sustainable energy supply poses challenges for energy market design in many countries. In Germany in particular, the coalition agreement of the new federal government sets a number of highly ambitious targets, such as an 80% share of renewables in gross electricity consumption in 2030.  Renewable energies (wind and PV) produce at low variable costs, but their feed-in fluctuates. What is needed, therefore, are power plants or storage facilities that can absorb the fluctuations, as well as sufficient expansion of the energy networks. There are also increasing efforts to make electricity demand more flexible to accommodate fluctuating supply. Finally, it is expected that the key energy sectors (electricity, gas, and hydrogen) will become increasingly integrated as part of the transformation to climate neutrality. The discussion as to whether the current energy market design can meet all these challenges and at which points further development may be required is on the top of the agenda.  Proposals for an adaptation of the energy market design are manifold.

In this project, we investigate various currently discussed climate policy measures in interaction with electricity trading, such as Carbon Contracts for Difference (CCfD), capacity markets for electricity producers or possible further developments of the remuneration systems for renewable energies. For this purpose, existing modeling approaches will be methodically developed further. In addition, we want to use experimental surveys to investigate consumers' incentives for flexibility in energy markets, with a focus on gas consumption due to current events. 

Methods

On the one hand, we want to further develop existing electricity market models in such a way that they can be used to model the interaction between the electricity market and the EU ETS and thus to investigate the impact of CCfDs for industrial plants in parallel with certificate trading. The model developed in this way will be extended to include additional mechanisms that are currently being discussed for a transition to a net-zero emissions world. These include various subsidy options for renewable energies, such as the current auction procedure for renewable energies in Germany and possible further developments thereof (e.g., CfDs), as well as capacity markets, which can be integrated into the model in addition to the energy-only market. These scenarios are compared with a scenario in which the investment incentives are induced solely by the CO₂ price in the market. 

On the other hand, in cooperation with Prof. Dr. Sarah Necker (Ludwig Erhard ifo Center for Social Market Economy and Institutional Economics), we want to explore in an experimental survey the current flexibility potentials in energy markets, the barriers to the use of these potentials, as well as possible incentives that can mobilize potentials. Due to current events, the focus will be on the reduction potential in gas consumption.

Contact

Dr. Christian Sölch
+49 (0)911 5302 95157
+49 (0)911 5302 95168
christian.soelch@fau.de