Sector coupling’s effect on the market price of renewable energy

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June 22, 2023


Energy / Energy Storage / RECOMMENDED / Renewable Energy


Sector coupling’s effect on the market price of renewable energy

A crucial effort for the future decades will be to decarbonize the energy supply by switching out fossil fuels for renewable energy sources to meet climate protection goals. When determining future financing requirements, knowing the potential growth and commercial viability of renewable energy sources in the power industry is critical. However, as variable renewable energy sources become more prevalent in the energy system, average market prices decline, and price volatility rises. Flexibility in the electricity market and improved connections between the electricity sector and other demand sectors can help keep the market values of renewable energy sources closer to the general market price level. Thus, sector coupling like this can aid in the economical switch to a low-carbon energy system.

Interconnection between renewable energy resources with energy sector coupling

Global renewable energy production has risen from 900 Terawatt-hour (TWH) in 2010 to 1200 TWH in 2021, with CAGR of around 2.65%. In 2020, the demand for all other fuels decreased while the usage of renewable energy climbed by 3%. The main factor was an increase of about 7% in power produced from renewable sources. However, some serious factors, such as decreasing electricity demand, supply chain issues, and building delays in many regions of the world, restrict the growth of this sector. But the flexibility in the electricity market due to long-term contracts, priority access to the grid, and continual installation of new plants supported the rise of renewable energy sources.
One of the key measures in decarbonizing the energy sector is the electrification of energy demand and the integration of end-use sectors. Since the cost of producing energy from renewable sources has gradually become more economical with other power sources, electric appliances are typically more efficient than fossil fuel alternatives. Thus, this strategy can potentially boost both renewable energy expansion and energy efficiency. Decarbonizing end uses that are tough to electrify can be aided by incorporating other renewable or carbon-neutral energy sources. For example, electrification through electric heat pumps is a particularly good alternative for decarbonizing the need for heat in buildings. Electrification of industrial processes that require energy to produce high-temperature heat is more difficult. In a fully decarbonized environment, the heat requirement can be met with renewable or carbon-neutral gas.

Different scenarios of decarbonized energy systems and their frameworks

To investigate the effects of sector coupling in the electrical sector on the market prices of renewable energy, we can consider different scenarios for a decarbonized energy system. The scenarios aim for a roughly 95% decrease in emissions in the electricity supply by 2050 compared to 1990 levels, which will result in a relatively high percentage of renewable energy in the supply. European Union’s climate protection target could be a perfect example in this context to understand the renewable energy market in considering carbon-neutral energy systems. European electricity transmission grid is a key factor in balancing the utilization of renewable energy even under fluctuating renewable energy generation.
The market values of renewable energy must be compared to a reference scenario to assess the effects of various sector coupling alternatives. Let us consider three electrical applications to understand the case: electric vehicles, decentralized heat pumps in buildings, and district heating grids. We can analyze the value of renewable energy by examining the flexibility of the three electrical applications. We can analyze the value of renewable energy by keeping some restrictions and varying combinations of these three electrical applications in different scenarios.

The market value of renewable energies also depends on future prices of fossil fuels and CO2. Decarbonization targets will eventually lead to an increased cost of fossil fuels and CO2. Hence, renewable energy will become progressively economical. Diversification of energy demands in electricity, hydrogen, and heat will also help in gaining the renewable energy market. Expanding renewable energy technologies, especially onshore wind energy, is crucial in enhancing total energy generation and reducing generation costs.

Market values of renewable energy – Sector Coupling

According to a study on the European market, market values of renewable energy are much lower than the base energy price. Since their feed-in lowers the market price due to their low marginal costs, the market values of RES are often significantly lower than the base prices. Even though PV generates less of Europe’s power than wind onshore, the European market values for PV are always lower than those for wind onshore. Electricity costs typically have the most impact on market values. The high PV feed-in in 2050 decreases the daytime cost of power.

Sector coupling significantly impacts countries with large PV feed-in, causing a notable impact on average power costs at noon, which are significantly lower than those during other hours. Market values are less impacted because wind feed-in onshore is typically not greatly influenced by the time of day. However, the absolute generation of the various technologies, the time of their feed-in, and the simultaneous occurrence of low energy prices are extremely country-specific factors that determine market values and how they relate to one another.

Impact of Sector Coupling on Renewable Energy Market Values

According to another study, considering renewable energy such as wind energy and PV coupled with electric vehicles, decentralized heat pumps in buildings, and district heating grids, the market values are € 64 and €58 per Megawatt-hour (MWh), respectively. In contrast, the same energy projected in 2050 has a base price of €81. When not coupled with such applications, the base price for wind onshore and PV is 39.9 €/MWh, while the market values for PV and wind onshore are 19.7 €/MWh and 26.6 €/MWh, respectively. It is exemplified that as the flexibility of energy sector coupling curtails, renewable energy’s market value will fall drastically. There are thus many more hours when the feed-in of renewable energy exceeds the power demand, leading to zero-priced electricity, renewable energy curtailment, and declining market values.

Future prospects of the renewable energy market with sector coupling

Enhancing the flexibility in the electricity sector through closer linkages with other demand sectors can greatly increase the market value of renewable energy. The short-term flexibility provided by load shifting may only provide a limited impact. The prospect of raising electricity demand during periods of high renewable energy output has a considerable and favorable influence on the market values of renewable energy. The high technical and hourly resolution is ideal for mapping weather-dependent renewable energy generation and highlights the value of flexibility in the energy system. Analysis of the distribution of energy costs and the occurrence of zero prices, or their simultaneous occurrence in several nations, may offer intriguing new insights into the various properties of the many flexibility alternatives.


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