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Energy Market Design (RWE AG)

  • Project Period: March 2011 - October 2011
  • Funding: RWE AG


With the transition of the German energy generation towards renewable energy sources initiated by the German government in 2011, guaranteeing the security of supply is becoming an increasing issue. This is due to the fact that a forced implementation of renewable generation capacities leads to a larger degree of fluctuation in the generation of energy. Currently, the implementation of different capacity mechanisms in order to either complement or even entirely substitute the conventional Energy-Only market is under consideration in various countries. There exist substantial doubts whether Energy-Only markets will be capable of incentivizing an adequate amount of generation capacity as part of the security of supply in the long run; capacity mechanisms are supposed to ensure a sufficient amount of investment in generation capacities, though.

Therefore, one part of our research concerns the possible existence of sound evidence whether the current market design in Germany is still in the position to meet the requirements of security of supply. Furthermore, we examine the influence of a massive extension of fluctuating renewable energy resources on the profitability of investment in conventional generation plants.

This research project analyses a variety of alternative market designs with regard to their respective economic pros and cons, emphasizing the likely performances of the so called capacity markets. In addition, the analysis is complemented with an evaluation of international experiences observed in different liberalized energy markets. The focus of the analysis of the distinct capacity markets is particularly drawn on risks associated with the regulation of crucial market elements. Furthermore, likely consequences on the European power market as well as on the degree of competition resulting from deficient incentives are analyzed. Further topics dealt with in this research project are potential transitional solutions, which create as little distortion of competition as possible.

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