Potential Limitations of Marginal Pricing for a Power System Based on Renewables


September  2022
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Marginal pricing wholesale power markets could produce significant barriers for the energy transition, and on their own do not appear to be appropriate organisational structures for renewables-based power systems. Besides the well-known cannibalisation and merit order effects (depressing renewable generator revenues as the transition advances), under a marginal pricing-based power system organisational structure, the high difference in marginal costs of the technologies needed to operate a renewables-based power system (bulk renewable generation and flexibility) may lead to socio-political instabilities such as those experienced during 2022 as a consequence of high natural gas prices.

A way to prevent the misalignments and transition barriers explored in this Technical paper is to change the power system organisational structure in such a way that it honours the different techno-economic characteristics of both bulk renewable electricity generation and flexibility. IRENA’s dual procurement proposal is an example of such an organisational structure. Marginal pricing can still play a role but with its scope limited to the procurement of flexibility.