Renewable energy is now seen as an almost indispensable instrument to overcome or at least mitigate climate change. Wind and solarenergy are among the most generally quoted renewable energy forms that are envisaged to offer the quantitative potentialcontribution to decarbonization, and between them, wind energy is the one usually considered to be closest to being economic.A system of incentives has been, and remains, necessary to foster the development of intermittent sourceswith the view of increasing their penetration into generation systems, sometimes at levels that are unjustified by current marketconditions. The effects of incentive policies of the subsidy type are usually difficult to monitor, and unintendedconsequences should not come as a surprise. This is the case in the European Union, which has been at the forefront of the use ofrenewable energy with the result that subsidized intermittent capacities are now jeopardizing the short term economics ofconventional units to a level that puts the adequacy of the system in question, with many new conventional plants being mothballedor dismantled because they are not profitable.This thesis concentrates on the situation going on in some European countries, where the high penetration ofrenewable energy, combined with energy conservation and other events related to the economic crisis have lead to a reduction ofwholesale electricity prices that questions the survival of conventional plants in the market. The main questions addressed arethe loss of conventional assets value, the cost of the subsidies implied by the current policies, and the influence of thetechnical constraints (reserve, ramping constraints and uncertainty in wind generation) for the system operation.The methodology consist of using equilibrium models based on stochastic programming. Two kinds of models are considered:i) a complementarity formulation for a multi-firm configuration that accounts for the separation between the PX and theTSO, andii) a welfare maximization problem for a single firm configuration. All the models assume price taking agents and nomarket powerwith the objective to simplify the economic discussion and concentrate on the economic and physical issues of marketdesign.The use of the models is illustrated on two questions motivated by the current phenomena observed in Europe, that consistof conventional plants, necessary for providing services, are driven out of the market because of low energy prices. The commonwisdom (and the observation of the market) is that renewable energies induce a decrease of energy prices together with a reductionof theactivity, and the profit, of the conventional units. The models show that this phenomenon indeed seems rather stable underdifferent structural assumptions (premium to wind generation and risk aversion), but it may also crucially depend on the demandfor ancillary services (here frequency maintenance) induced by renewable energies and on their pricing by the market design. Wefind that ahigher demand for load following reserve and an economically sound pricing (marginalcost pricing) restore the revenue of the conventional plants. The question of the sustainability of conventional plants thenleads to the proper identification of the demand for services and the acceptance that they will be properly remunerated.
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