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By 2050, the European Union aims to reduce greenhouse gases by more than 80%. The EU member states have therefore declared to strongly increase the share of renewable energy sources (RES-E) in the next decades. Given a large deployment of wind and solar capacities, there are two major impacts on electricity systems: First, the electricity system must be flexible enough to cope with the volatile RES-E generation, i.e., ramp up supply or ramp down demand on short notice. Second, sufficient back-up capacities are needed during times with low feed-in from wind and solar capacities. This paper analyzes whether there is a need for additional incentive mechanisms for flexibility in electricity markets with a high share of renewables. For this purpose, we simulate the development of the European electricity markets up to the year 2050 using a linear investment and dispatch optimization model. Flexibility requirements are implemented in the model via ramping constraints and provision of balancing power. We found that an increase in fluctuating renewables has a tremendous impact on the volatility of the residual load and consequently on the flexibility requirements. However, any market design that incentivizes investments in least (total system) cost generation investment does not need additional incentives for flexibility. The main trigger for investing in flexible resources is the achievable full load hours and the need for backup capacity. In a competitive market, the cost-efficient technologies that are most likely to be installed, i.e., gas-fired power plants or flexible CCS plants, provide flexibility as a by-product. Under the condition of system adequacy, flexibility never poses a challenge in a cost-minimal capacity mix. Therefore, any market design incentivizing investments in efficient generation thus provides flexibility as an inevi complement (C) 2014 Elsevier B.V. All rights reserved.

The EU member states have declared to strongly increase the share of Renewable Energy Sources in the next decades. Given a large deployment of wind and solar capacities as well as limited cost-efficient storage technologies, this has two major impacts on electricity systems. First, the electricity system has to be flexible enough to cope with the volatile RES-E generation i.e. ramp up supply or ramp down demand on short notice. Second, sufficient back-up capacities are needed for times with low feed-in from wind and solar capacities. The provision of both back-up capacity has been intensively discussed in the previous literature of recent years (for instance Cramton and Stoft, 2008 and Joskow, 2008). In addition, Lamadrid et al (2011) argue that with increasing volatility, incentives to invest in flexible resources should be implemented in market design. However, they did not have a look at the dynamic view in an integrated analysis necessary to to answer the questions of how an electricity system can adapt to an increasing share of renewables. This paper therefore analyses the flexibility requirements of the future European electricity system and the policy implications for market design with a system-economic dynamic approach. For this purpose, we simulate the development of the European electricity markets up to 2050 by using a linear investment and dispatch optimization model. Flexibility requirements are implemented in the model via constraints for ramping and provision of balancing power. We find that although an increase of fluctuating renewables has a tremendous impact on volatility and therefore flexibility requirements, the main trigger for investments into flexible conventional capacity are the achievable full load hours rather than ramping capabilities. Therefore any market design with investment incentives of achievable full load hours does not need additional incentives for flexibility.

By 2050, the European Union aims to reduce greenhouse gases by more than 80 %. The EU member states have therefore declared to strongly increase the share of renewable energy sources (RES-E) in the next decades. Given a large deployment of wind and solar capacities, there are two major impacts on electricity systems: First, the electricity system must be flexible enough to cope with the volatile RES-E generation, i.e., ramp up supply or ramp down demand on short notice. Second, sufficient back-up capacities are needed during times with low feed-in from wind and solar capacities. This paper analyzes whether there is a need for additional incentive mechanisms for flexibility in electricity markets with a high share of renewables. For this purpose, we simulate the development of the European electricity markets up to the year 2050 using a linear investment and dispatch optimization model. Flexibility requirements are implemented in the model via ramping constraints and provision of balancing power dependent of current renewables feed-in. We find that an increase in fluctuating renewables has a tremendous impact on the volatility of the residual load and consequently on the flexibility requirements. However, any market design that incentivizes investments in least (total system) cost generation investment does not need additional incentives for flexibility. The main trigger for investing in flexible resources are the achievable full load hours and the need for backup capacity. In a competitive market, the cost-efficient technologies that are most likely to be installed, i.e. gas-fired power plants or flexibel CCS plants, provide flexibility as a by-product. Under the condition of system adequacy, flexibility never poses a challenge in a cost-minimal capacity mix. Therefore, any market design incentivizing investments in efficient generation thus provides flexibility as an automatic complement.

The EU member states have declared to strongly increase the share of Renewable Energy Sources in the next decades. Given a large deployment of wind and solar capacities as well as limited cost-efficient storage technologies, this has two major impacts on electricity systems. First, the electricity system has to be flexible enough to cope with the volatile RES-E generation i.e. ramp up supply or ramp down demand on short notice. Second, sufficient back-up capacities are needed for times with low feed-in from wind and solar capacities. The provision of both back-up capacity has been intensively discussed in the previous literature of recent years (for instance Cramton and Stoft, 2008 and Joskow, 2008). In addition, Lamadrid et al (2011) argue that with increasing volatility, incentives to invest in flexible resources should be implemented in market design. However, they did not have a look at the dynamic view in an integrated analysis necessary to to answer the questions of how an electricity system can adapt to an increasing share of renewables. This paper therefore analyses the flexibility requirements of the future European electricity system and the policy implications for market design with a system-economic dynamic approach. For this purpose, we simulate the development of the European electricity markets up to 2050 by using a linear investment and dispatch optimization model. Flexibility requirements are implemented in the model via constraints for ramping and provision of balancing power. We find that although an increase of fluctuating renewables has a tremendous impact on volatility and therefore flexibility requirements, the main trigger for investments into flexible conventional capacity are the achievable full load hours rather than ramping capabilities. Therefore any market design with investment incentives of achievable full load hours does not need additional incentives for flexibility.