The growing role of renewable energy in Europe is creating ever bigger uncertainties for the economics of conventional power stations. Yet it’s exactly such conventional – and controllable – electricity generators that are desperately needed to back-up the inevitable fluctuations of renewables. As a result, more and more countries are thinking about bringing in so called capacity markets or mechanisms – in other words, financial support for the provision of conventional power stations on stand by. (see graphic)

Closely networked

The close links between Switzerland’s electricity grid and those of its neighbours, and the importance of electricity trading, mean the country is directly affected by such developments. Not only is Switzerland exposed to the market distortions created when other countries subsidise renewables like solar and wind power, it can also be adversely affected by the potentially downward impact on pricing of its neighbours’ future capacity mechanisms.

Such exposure makes it difficult for Switzerland to ignore developments in energy policy abroad. Admittedly, Swiss consumers could benefit from lower average electricity prices. But Swiss generators’ profits would also come under pressure. In the longer term, security of supply could even be jeopardised as building new domestic power plants became less attractive.

Conversely, unilaterally introducing a support scheme for conventional power stations would make little sense for a small country like Switzerland that is closely linked with its neighbours. And it would be of limited benefit: domestic consumers would bear the costs, without being compensated by lower wholesale electricity prices or lower or less frequent premiums for peak power usage. And a capacity market for Switzerland alone would be inherently inefficient, because of high administrative costs, inadequate liquidity and insufficient competition between individual power stations and generators. In such circumstances, there would be virtually no alternative to working closely with Switzerland’s neighbours.

Policy options

Given all the above, Switzerland should avoid any intemperate action and instead take a cautious, wait and see approach. The country can afford to sit back, as domestic generating capacity looks more than adequate for the foreseeable future.

But Switzerland should address the growing market distortions caused by the arrival of new and volatile sources of energy by more actively managing demand. That will require making consumers much more responsive to short term price fluctuations than today – something that could become possible principally through more smart metering and more flexible tariffs. For the moment, however, such solutions are being impeded by the fact that the electricity market has still not been fully liberalised for households and small business.

Ultimately, the analysis demonstrates subsidising renewables via cost covering feed in tariffs is not sustainable. Such feed in pricing not only exacerbates the problem of investing in conventional power stations, it also becomes progressively less efficient as more renewable power is fed into the grid. If the government is determined to stick to explicit subsidies for renewables, its policy must be redesigned thoroughly to bring it closer into line with the market.