System Costs or Subsidy Costs? Market Design and RE Policy Interaction in Advancing Energy Transitions.

The literature on policy mixes has stressed the need to analyze policies in their mix (Rogge & Reichardt, 2016). The interaction of different types of policies might lead to a different outcome than when a policy is allowed to function on its own. This becomes crucial in advancing energy transitions, where time and resources are scarce. However, the literature on policy mixes has yet not explored the relation between RE policies and electricity market design. Electricity market designs are part of the fundamental institutions that regulate how electricity can be traded and balanced within the electricity system. Different types of market designs will provide different conditions for cross-border trade and system operation, which again has large implications for overall costs and whole-sale electricity prices (Bjørndal & Jörnsten, 2007). As the energy transition advances, the cost levels for variable renewable energy (RE) continue to fall. For example, auctions for off-shore wind in Germany and Denmark have resulted in very low or zero prices for the winning bids, spurring a discussion about the need for phasing out subsidies (Schmidt et al., 2019). However, cost competitiveness of RE is context specific and depends on several factors, including the level of the CO2 price, interest rates, geographical conditions and market design. The latter is not yet sufficiently explored in the energy policy literature. This paper examines the relationship between market design and RE support in two countries with advanced energy transitions: Denmark and Germany. These two countries are particularly interesting for a cross-case comparison for three main reasons. First, they have undergone a thorough transformation of their electricity systems during the past 20 years, resulting in high shares of RE (>40%) and an incremental phase out of coal and nuclear power. Second, both countries continue to support RE. Large-scale RE plants receive a sliding premium, equaling the difference between the whole-sale market price and a fixed remuneration level. Third, despite the fact that they are neighboring EU member states, their market designs vary substantially, with large implications for the total costs of the RE support system. The paper draws on the literature on sustainability transitions and policy mixes in order to capture the interaction between different components of the electricity system, market design and specific types of RE policies (Lindberg, Markard, & Andersen, 2019). These interactions are explored through semi-structured expert interviews in both countries. The findings are compared to a quantitative analysis of system costs, subsidy costs and whole-sale market prices. The findings show that RE policies and market design interact in several ways, and that these interactions play a crucial role for how key aspects of the energy transition are organized and managed. This is also of increasing importance for questions related to upscaling and acceleration of sustainability transitions. Confronted with the large challenges of decarbonizing our energy systems, the paper argues that “the politics of market design” deserves more attention from social science researchers.