Can liberalised electricity markets support decarbonised portfolios in line with the Paris Agreement?

Abstract

We model the evolution of the Central Western Europe power system until 2040 with an increasing carbon price and strong growth of variable renewable energy sources (vRES) for four electricity market designs: the current energy-only market, a reformed energy-only market, both also with the addition of a capacity market. Each design is modelled for two decarbonisation pathways: one targeting net-zero emissions by 2040 for a 2 °C warming limit, and the other targeting −850 Mt CO₂ y‾ for a 1.5 °C warming limit. We compare these scenarios against the high-level objectives of delivering low-carbon electricity reliably to consumers at the lowest possible cost. Our results suggest that both 2 °C and 1.5 °C compliant systems could be achieved and deliver electricity reliably. In terms of cost, we find the 1.5 °C warming scenarios lead to system costs which are twice as high as the 2 °C scenarios due to the high cost of negative emission technologies – in particular direct air carbon capture (DAC). To make a 1.5 °C target more affordable, policymakers should investigate lower cost alternatives in other sectors, and increase research and development in DAC to reduce its cost.