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

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.