REMARC UniPi

In the new article published in Renewable and Sustainable Energy Reviews REMARC researchers Simone D’Alessandro and André Cieplinski, together with Francesco Marghella from Althesys Strategic Consultants, investigate whether and how much the combination of liberalized markets with low marginal cost intermittent renewable energy sources (RES) tends to reduce electricity prices and, hence, the profitability of new investments in wind and solar, thus rendering price-incentives less effective or more costly. The article presents a new system dynamics model (New Electricity Trends – NET) that integrates a top-down ecological macroeconomic module and a bottom-up electricity sector module. The results are based on 3 scenarios: high RES-low demand, Baseline and Low RES-high demand. These are defined ex-post, clustering 1000 simulations which differ in terms of RES investment costs, fuel and CO2 prices, electricity demand elasticity and a price-incentive policy. The simulations project an inverse relation between the % of RES and electricity demand as well as a decreasing long-term trend in prices. THe latter is explained by a pronounced reduction of hourly prices during the day, when solar is active. Even with similar price subsidies, reductions in investment costs and increases in fossil fuel and CO2 prices, simulations with a strong expansion of electricity demand do not reach high shares of RES in supply. The results support the renewable energy policy paradox since the price incentive is ineffective until late in our scenarios. Still, they also suggest that a subsidy paying prices above the full cost faced by VREs, although costlier, could increase the % of RES under current market design. The price projections are in contrast with the increasing ones in official projections for Italy. This divergence highlights the importance of employing different techniques to assess the reliability of scenarios for the evolution of electricity markets.