The German electricity market changes elementarily these days. Renewable energy replaces such from conventional sources. At the same time, more and more electricity is produced in northern Germany and needs to be transmitted to the consumers in the south. While effectively supporting the development of renewable energy, the current market design implies high costs. Simultaneously, regional imbalances between generation and consumption appear. These are caused both by the soaring feed-in of renewables in the north and by declining conventional capacities in the south. Unsurprisingly, numerous proposals for reforms of either the current feed-in tariff system for renewables (Erneuerbare-Energien-Gesetz, EEG) or for investments in the electricity grid have been presented. Most of those proposals neglect, however, the interaction between both aspects.
We sketch a new market design for the German electricity market jointly taking into account an efficient expansion of renewables and the grid’s stability. A premium paid in addition to the spot market price promotes renewable electricity. The market premium reveals the scarcity of electricity both in the regional and temporal dimension to operators of renewables through its connection to market prices. This reduces distortions in the electricity market and yields scarcity prices to conventional and renewable electricity generators. At the same time, it yields reliable revenues reflecting avoided externalities.
Furthermore we propose to split the German electricity market into a small number of price zones to cope with insufficient transmission capacities. When capacities are not adequate to transmit electricity, prices in the zones diverge. This yields endogenous information about needs for investment in generation and transmission capacities.
By systematically strengthening regional and temporal price signals we expect to achieve a notable cost reduction, both compared to the current market design and compared to approaches not taking into account the promotion of renewables and the stability of the grid jointly.