Challenges in the Electricity Market under a High Share of New Energy
Release time:
2024/03/02
Despite their clear advantages in low-carbon, environmentally friendly, and clean energy production, new energy sources—due to their uneven spatial output distribution and temporal mismatches between supply and demand—can give rise to a host of challenges in existing electricity market mechanisms, including price disappearance, price erosion, low efficiency in the utilization of distributed generation and storage, and poor interaction among demand-side resources.
Despite their clear advantages in low-carbon, environmentally friendly, and clean energy production, new energy sources—due to their uneven spatial output distribution and temporal mismatches between supply and demand—can give rise to a host of challenges within existing electricity market mechanisms, including price disappearance, price erosion, low efficiency in the utilization of distributed generation and storage, and poor interaction among demand-side resources.
Low operating costs of new energy sources drive down system clearing prices, leading to the disappearance of spot market prices.
Currently, electricity markets employ marginal-price clearing, whereby the price of the last unit of electricity required to achieve supply–demand equilibrium serves as the uniform clearing price. In power markets dominated by fossil fuels, this approach represents the optimal solution for ensuring incentive compatibility among all market participants, since the marginal generator—the one with the highest bid among the winning generators—determines the clearing price, and all generators receive revenue at that rate. However, the integration of a high share of renewable energy disrupts the equilibrium underlying this marginal-price-clearing mechanism. In conventional generation, the bids submitted in market auctions reflect variable costs, whereas for renewables the primary cost is the fixed capital expenditure incurred during the construction phase, with operating costs being virtually negligible. As renewables come to dominate power generation in the future, it is foreseeable that they will become the principal marginal generators, leading to frequent occurrences of extremely low or zero prices and even price “gaps.” With market prices effectively disappearing, how can we ensure the efficient allocation of resources across the board, and how will the generation–grid–load–storage system interact going forward?
The disappearance of price signals resulting from the increasing share of new energy has already begun to emerge in both domestic and international market operations. In May 2023, the Shandong market recorded a cumulative total of 32 hours of negative electricity prices over the 1st and 2nd, with the longest continuous period of negative pricing lasting 22 hours; on May 1, the average spot trading price was as low as –0.013 yuan per kilowatt-hour. Similar instances of negative electricity prices have also been observed in Australia’s South Australian and Victorian electricity markets, where the average photovoltaic electricity price in December 2022 was negative in both regions, thereby undermining the overall value of photovoltaic power generation across the entire area.
In fact, this situation will become even more pronounced as the share of renewable energy increases. The UK Department for Business, Energy & Industrial Strategy has conducted an analytical forecast of wholesale electricity prices under different future scenarios for the UK, with the cumulative distribution of clearing prices for 2025, 2035, and 2050 shown in the figure below. As can be seen, under the current UK electricity market design, wholesale prices in both 2035 and 2050 are projected to feature zero or negative prices in more than half of the trading periods. While such short-term negative prices may to some extent incentivize investment by market participants, the longer-term consequences—such as their impact on medium- and long-term price formation and their potential to dampen investment in new energy—are likely to outweigh any benefits.
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