As part of the EWI Insights webinar series, Martin Lange and Stephan Terhorst, Research Associates at the Institute of Energy Economics at the University of Cologne (EWI), presented the results of two recent studies on the role of flexibility in the electricity market. The event was moderated by Dr Philip Schnaars, Head of Research Area at the EWI.
The event looked at the effects of a potential bidding zone split in Germany on the one hand and the consequences of increasing price volatility on the profitability of flexibility options on the other. In particular, the first presentation focused on practical obstacles when implementing a bidding zone split in Germany, which could severely limit efficiency benefits. The key finding of the second study presented is that the volatility of electricity prices could increase significantly in the future, which should have a positive impact on the attractiveness of flexibility options.
In the first part of the webinar, EWI researcher Martin Lange presented the results of a recent analysis on the economic effects of a potential bidding zone split in Germany. The policy brief entitled ‘Bidding zone split in Germany – What’s it all about?’ was written by him, Merit Dressler and Dr Philip Schnaars and deals in particular with the static and dynamic effects of a split in theory and practice. The background of the proposal to divide the German-Luxembourgish bidding zone into a south-west and a north-east zone are grid bottlenecks, caused by the increased off-load expansion of wind power in northern Germany. Splitting the bidding zone could set regionally differentiated price signals and thus incentivise more system-friendly investments. The analysis shows that a split could reduce redispatch costs in the short term. Also, a split could result in higher electricity prices in the south and lower prices in the north, allowing investments in generation and flexibility to be channelled in a more targeted manner.
However, the analysis also points to challenges: The proposed split represents an inaccurate design adjustment, whereby there would still be a need for redispatch and system-friendly location within the zones is not incentivised. In addition, a split would be accompanied by significant investment uncertainties, a tendency towards increasing market concentration and high transition costs. The extent to which the price incentives are sufficient to have an impact on the regional investment decisions of producers and flexibilities depends not only on state subsidies for renewable energies and other end customer price components, but also on additional factors. ‘As a result of the practical restrictions and obstacles, the disadvantages of a split could outweigh the efficiency benefits in the long term,’ said Lange.
In the second part of the event, Stephan Terhorst presented the analysis of future price volatility on the electricity market that he had prepared with Erik Schrader, Arne Lilienkamp, Dr Fabian Arnold and Dr Philip Schnaars. Terhorst emphasised that increasing volatility is particularly important for new investments in flexibility technologies. Due to the increasing share of volatile renewable energies and the decline in controllable power plants, the modelling for 2035 shows a significant increase in price fluctuations in the day-ahead and intraday market.
Flexibility options such as battery storage, controllable loads and electrolysers can benefit from higher price fluctuations, as they can store energy in times of low prices and feed it in profitably during periods of high prices. At the same time, the number of extreme prices is increasing, meaning that both negative prices due to high feed-in from renewable energies and high peak prices in congestion situations occur more frequently. The higher volatility makes investments in controllable power plants and storage facilities more attractive, but at the same time the general price level is falling, which affects the profitability of producers and flexibilities.
In addition to the expansion of renewable energy sources, other market design factors also influence volatility. A reduced expansion of controllable power plants would increase price volatility, while lower demand would also contribute to this. A lower expansion of PV, on the other hand, dampens the fluctuations and stabilises the market. Model calculations for the year 2035 show that the arbitrage potential for flexible technologies increases with increasing volatility. However, the influence of volatility varies depending on the technology and market structure under consideration. While battery storage systems can benefit from short-term price fluctuations, long-term investment decisions are made more difficult by the uncertainty of future price developments.
The two studies make it clear that electricity market design and volatility have a significant influence on the expansion of flexibility. While a bidding zone split could incentivise investment in the long term, increasing price volatility can lead to new business models in the flexibility sector in the long term.
The online workshop series EWI Insights has been taking place around four times a year since 2020 and is aimed at experts from business, science and politics who are interested in scientific findings from the energy world. EWI researchers offer insights into current studies and analyses by the institute. Information on current EWI events can be found here.
