1. MEMO
Market design options to host
massive variable renewables
Vienna, 05 February 2013

2. Key principles of Market Design for “Hosting renewables?”
1. Sustainable development: MD should incentivise investments in RES generation.
- RES revenue stream must be safe and sufficient . Current CO2 prices too low to ensure profitability alone.
- Variable RES should not be exposed to risks they cannot manage.
2. Security of supply: MD should incentivise the developments of flexible resources
needed to cope with RES specific features.
- No discrimination should be made between the different resources: Generation (Including RES ! ), DSM,
Interconnection, storage.
- Ensuring back-up resources can cover their costs in the long-term
3. Competitiveness: Consumers and Taxpayers should not pay more than necessary to
achieve these objectives.
-Significant pressures on costs at time of economic crises.
-Significant upfront investment costs are necessary in most cases: financing is a significant constraint.

3. Feasible MD options to host renewables
1. First evolution: RES become part of the market.
With penetration levels of 20%-40%, RES cannot be kept out of the market anymore.
- Exposing RES to electricity prices: e.g. feed-in premiums instead of feed-in tariffs.
- Technical standards of controllability imposed on RES installations above a given threshold.
- Allowing RES to take part into balancing arrangements.
2. Second evolution: MD rewards flexibility better
If flexibility has a higher value in electricity markets, there must be a price for it, which requires the
definition of “new products”.
- Shorter time-period , possibility to trade closer to real-time, removing price caps and floors.
- Requires consistency in product definitions not only between the different electricity markets but
also with gas markets and allocation of transmission capacity.
- Nodal Pricing ?!
- Forward reserve markets could help securing the revenues of flexible resources.
The more products, the weaker the liquidity. Market coupling can be a solution to extend the
geographical scope and offset this phenomenon.
3. Potential revolution:
- Introduction of capacity remuneration mechanisms. Is an energy-only market really unsustainable or
is it only logical at times of transition and low economic growth ?

4. The German Electricity Market Reform
1. RES moving towards the market
Previously: all RES production managed by TSOs, producers receiving a fixed FIT.
Since January 2012: introduction of direct marketing. Producers have the possibility to sell their own production:
they receive the difference between the FIT and wholesale market prices, are exposed to imbalances, and get an
extra “management premium” equal to 12€/MWh. This scheme has been very successful with two thirds of
producers moving towards direct marketing within 8 months.
2. Flexibility tools introduced in the market
Gate-closure reduced to 45 minutes in March 2011; ex-post balancing possible until the following day.
15-minute contracts introduced in the German Intraday market in December 2011, in order to “facilitate the
German energy transition”.
3. Incentives for flexible resources
Measures to facilitate and accelerate the development of new transmission capacities.
New storage facilities exempt from grid charges.
Funds to encourage more flexible (high ramping capability) fossil-powered plants.
After a strong development of RES by keeping them out of the market, there is a clear willingness to get RES into
the market. Direct marketing allows the producers who are able to manage their production to do so, while small
producers can remain under the aegis of the TSOs.
A lot of the measures put into place are still not market-based. 30/01/13: EON considers closing Irsching power
station, one of the most modern European gas-fired power station, blaming the “unmanaged growth” of
renewables and the need for “fair rules”. Is it an issue or only normal at times of transition and slow economic
growth?

5. The UK Electricity Market Reform
1. Tradable Renewables Obligation (RO) replaced with Contract-for-Difference.
Argument is that gas-fired plants have a natural hedge against changes in the electricity prices, whereas
low-carbon plants do not. The idea is to decrease risk for low-C units and hence lower cost-of-capital for
investors.
A cash limit has also been introduced to cap annual spending.
2. Carbon Price Floor
Designed to deliver a clearer message than low EU ETS prices.
3. Emissions Performance Standards
Imposing limits on CO2 emissions per kWh from power plants.
4. Capacity Remuneration Mechanisms
The UK is facing low capacity margins, plans to introduce a capacity markets.
Newbery: the “UK electricity market reform doesn’t reform the electricity market.”
Introducing a further layer of complexity: carbon price floor, capacity mechanisms... Issues of
administrative burden, and compatibility with the IEM.
Aims to provide certainty disturbed by measures such as the cash-limit. It is also argued that the state
should not be responsible for hedging risks (form of hidden subsidies for low-C technologies) .