Electricity markets for low-carbon energy

RoadResearchers: Professor Richard Green

Meeting the UK’s targets for decarbonising the economy will require electricity generation to be largely carbon-free by 2030, according to the Committee on Climate Change.  EU targets for renewable energy imply that around one-third of Britain’s power would have to come from renewable generators by 2020, with significant impacts on the electricity market.

Richard Green has been researching electricity markets for over twenty years.  His recent work, mostly funded through the Research Councils’Supergen FlexNet Consortium, has concentrated on the economic and market impacts of low-carbon energy.

Wind generators are likely to dominate the UK’s supplies of renewable electricity by 2020, and their output obviously fluctuates with the weather.  This leads to greater variations in the demand placed on the remaining power stations, and hence in electricity prices – a phenomenon that he has been modelling with Nicholas Vasilakos of the University of East Anglia.  In the medium term, changing the pattern of electricity prices will change the profitability of power stations, and generators will have an incentive to build a different mix of plants.  Further joint work has shown that in the long term, the changes to the UK’s mix of power stations are likely to be much greater than the change in the pattern of power prices – although these will be increased by the subsidies needed by (most) renewable generators.

Effective policies can minimise the subsidies required, by creating market designs that encourage efficient operation (and investment) decisions and by minimising the risks faced by generators.  Another strand of this work studies electricity market designs, economic regulation and renewable support policies, considering their interactions in the light of good practice from around the world.  This includes the finding that a (credible) carbon tax produces much lower fluctuations in the profits of low-carbon generators (nuclear and renewable stations) than the existing system of emissions trading, since the price of emissions permits tends to vary with the price of gas and both feed through into the price of power.  A varying power price has little impact on the profits of a gas-fired generator with similarly varying costs, but creates significant risks for most low-carbon generators with costs that are largely fixed.  Policies that fail to take account of such effects could significantly increase the cost of low-carbon energy for consumers and businesses.