Our most important findings

This would be roughly in line with the quickest deployment levels seen in previous years. With a rapid decline in technology costs, wind and solar can serve as a substitute for new nuclear and hydro, which current plans foresee growing at an unrealistically high rate.

Restructuring the power system will be essential in order to keep it reliable and cost-effective. Inflexible baseload technologies and non-merit-order-based, coarse-scale dispatch are incompatible with a system that is increasingly dominated by weather-dependent power generation technologies.

Recent policy reforms have moved in the right direction, as China has started pilot projects for emissions trading, has reviewed its renewables remuneration scheme, and has acknowledged the need to create a power spot market. However, fundamental challenges remain to be addressed. These include overcapacity in coal-fired assets, an inflexible dispatch system, and a lack of data transparency and accessibility for market participants.

China has the opportunity to leapfrog to a renewables-led power system design that ensures cost-effectiveness and reliability. The Five Golden Rules we develop in this paper will help policy makers view the various policy instruments and emerging sectoral markets both pragmatically and coherently while taking into account interdependencies and avoiding inconsistencies:

Golden Rule 1: Use existing generation capacity efficiently by implementing short-term markets

Golden Rule 2: Incentivise flexibility to ensure system reliability and adequacy

Golden Rule 3: Provide stable revenues for new investment in renewables

Golden Rule 4: Manage the decline of coal and its structural consequences

Golden Rule 5: Acknowledge the pivotal role of transparency and data accessibility

Wind and solar are today cheap technologies that are on equal footing with coal and gas. However, high cost of capital oftentimes hinders renewables projects from going forward, even when there is excellent potential. Bridging that gap, a RES-CRF will bring significant cost savings to consumers and taxpayers in those countries

The risk of the financial guarantee underpinning the RES-CRF ever being called is very small. We propose a set of concrete safeguards to ensure only high quality renewable energy investments will benefit and to avoid over-commitments.

Committed public funds to implement Article 3.4 of the new EU Renewable Energy Directive would create scope for establishing the RES-CRF. This would help Europe to meet its 2030-renewable energy target and enable all Member States to benefit from low-cost renewable energy.

A key design feature of the RES-CRF is its flexibility. Being largely based on contractual arrangements, it can be tested in specific sectors or Member States before a wider roll-out. Launching a pilot project before 2020 would help strengthen confidence in the instrument. A pilot can be financed from the running EU budget.

They are also much more sensitive to political and regulatory risks. This is highly relevant when addressing Europe’s 2030 renewables framework consisting of a binding EU target without binding Member States targets.

Perceived ex-ante risks translate into country specific premiums on the costs for renewable energy investments that have nothing to do with technology risks or weather conditions.

It would also allow for broader sharing of the social, economic and health benefits of renewable energy investments, and would particularly benefit EU Member States with lower than average per capita GDP.

Some key design elements of intraday and balancing markets as well as imbalance settlement rules distort wholesale power price signals, increasing the cost of providing flexibility. This highlights the need to adjust key market design elements and requires continuous political momentum to coordinate efforts regionally.

Restrictive requirements for market participation, mainly relating to demand response and renewables, constrain the flexibility potential. In the balancing markets, small minimum bid sizes and short contracting periods would be required. A regulatory framework enabling independent aggregation should be implemented for fully tapping the flexibility potential.

A joint balancing market design in the PLEF region with short product duration, late gate closure and marginal pricing would enable efficient cross-border competition for flexibility services. Getting the pricing right in balancing mechanisms is important as it support sefficient pricing in preceding day-ahead and intraday markets – where most of the flexibility is traded.

Intraday markets are critical for integrating wind and solar, as they allow for trades responding to updated generation forecasts. Today, explicit cross-border capacity allocation as well as misalignments in gate closure times across the region and differing product durations result in inefficient intraday energy and interconnector capacity allocation. Thus, harmonised rules and improved implicit cross-border allocation methods are needed, e.g. improved continuous trading or intraday auctions.

Whenever there iscapacity shortage in one country, prices in that country rise, favoring power plants in the other country to export. This is done automatically via market coupling.

A cross-border challenge in security of supply arises only during days with very cold weather and very little wind in both countries at the same time. An analysis of historical weather data suggests that after 2023 this might occur about six days in ten years.

Different market designs between Germany and France will generate some redistributive effects, but they are limited by the level of interconnections between the two countries (currently 3 GW) and joint market coupling with other European countries.

The French proposal, while effectively decentralized by nature, relies significantly on regulated components, with a centra lrole going to the TSO. Similar design elements are currently missing in the BDEW/VKU model, leaving the question open as to who would actually supervise, control and sanction this scheme in Germany.

These questions include monitoring and control issues as well as rules for delivering capacities in foreign markets without interfering with market coupling. Addressing these questions requires political and technical cooperation on both sides of the border, especially when it comes to situations of joint scarcity.

The introduction of competitivebidding for a specific renewable-energy technology in a given country needs to be preceded by a thorough analysis of the conditions for successful tendering, including market structure and competition. Specific project characteristics of the various renewable-energy technologies must be considered appropriately in the auction design.

Prior to adoption of tendering schemes, multiple design options should be tested in which the prequalification criteria, auction methods, payment options, lotsizes, and locational aspects are varied. Learning and gaining experience is of utmost importance, as poor auction design can increase overall costs or endanger deployment targets.

Experiences made with auctions for certain technologies (e.g. solar PV) cannot be readily applied to other types of renewable energy. Onshore wind is particularly difficult due to the complexity of project development, including extended project time frames (often over two years), the involvement of multiple permitting authorities and the need for local acceptance.

The auction should be designed to facilitate a sufficiently large number of participating actors, as this will minimise strategic behaviour and ensure a level playing field for all actors, thus enabling healthy competition. As renewable deployment often hinges critically on local acceptance, enabling the participation of smaller, decentralised actorsin auctions is important.