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Voluntary Curtailment Agreements

by on April 14th, 2021

We are studying the large-scale integration of electricity generated from renewable sources (RES-E) into the German energy market. Highly negative wholesale prices indicate that market design could be improved. We argue that allowing flexible use of voluntary reduction agreements (HAV), while maintaining the priority power rule, would improve the efficiency of the entire system. Improved investment conditions due to the flexible use of HAVo, which lead to higher installed capacity, could compensate for reduced wind performance and not hinder climate policy objectives. For the large-scale integration of electricity generated from renewable energy sources (RES-E), the German system seems to be running into its limits. In 2009, the wholesale electricity market experienced considerable negative prices in times of strong wind expansion and low demand. The buyback system in Germany consists of a fixed buy-back price, a start-up bond and an RES priority rule and, in practice, a very restrictive application of the RES-E restriction. It is precisely this last point that is the problem. We argue that the overall performance of the system would improve significantly by removing restrictions on the application of voluntary reduction agreements, while maintaining the priority rule as such. As RES-E producers can only improve as part of this systemic reform, investment conditions are improving, resulting in an increase in RES-E`s installed capacity. This, in turn, implies that a reduction in wind power can actually be offset by higher wind performance at all periods when there is no problem. On-demand companies offering discount contracts are encouraging consumers to reduce demand consumption at peak events.

Unconsumed consumption is sold as a virtual supply in the electricity market. We study two types of contracts: automated and voluntary. The automated contract requires a fixed limit on registered consumers, while the voluntary contract allows the restriction to vary according to the opportunity costs borne by the consumer. In this article, we look at the optimal choice of type of contract, first from the company`s point of view and then from the perspective of a social planner. We show how both types of contracts can be optimal depending on market/customer conditions.

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