Market premium model, market premium and market value
Terms briefly explained
The terms market premium model, market premium and market value were established with the organisation and introduction of direct marketing of green electricity in 2012. Direct marketing is a subsidised form of marketing green electricity. Previously, operators of renewable energy plants had to supply the electricity generated to the grid operator. In return, they received a feed-in tariff - the EEG subsidy (see Renewable Energy Sources Act). Since the introduction of direct marketing, they can sell the electricity directly on the wholesale market. The market premium model ensures that direct marketing is just as financially reliable as conventional EEG support. Renewables are thus becoming better and better integrated into the market.
What is meant by the market premium and the market premium model?
As a rule, spot market prices in day-ahead trading are lower than the specific subsidy level of a wind or solar power plant. The market premium compensates for the difference between the current market value and the plant-specific subsidy amount. It therefore prevents financial losses compared to the conventional EEG subsidy.
The market premium model ensures that solar or wind power plants can be operated profitably via direct marketing of electricity. Operators should not suffer any financial disadvantages compared to EEG-subsidised plants. This form of direct marketing is known as EEG direct marketing or direct marketing in the market premium model.
System operators either decide to do so voluntarily or are obliged to do so: Since 2016, systems with an output of over 100 kilowatts must be remotely controllable and are subject to what is known as mandatory direct marketing.
Electricity producers can also voluntarily market their green electricity directly. They then sell it at the market price on the exchange - without a subsidy such as the feed-in tariff or the market premium. This so-called other direct marketing is particularly attractive for plants that are no longer subsidised under the EEG after 20 years of operation.
Until 2014, the management premium was listed and paid separately. This covers marketing risks. Today, according to the EEG, the management premium is priced into the market premium and paid out by the grid operator.
- What is the market value?
The market value of electricity reflects the average hourly prices on the EPEX Spot market. In addition, the spot prices are offset against energy source-specific factors. The market value therefore reflects the value of the electricity fed into the grid depending on its technology. This is why the specific market values are also called monthly market value for solar, market value for onshore wind and market value for offshore wind.
- What is the investable value?
The value to be applied is also used to calculate the market premium. It represents the EEG subsidy rate for renewable energies. It was initially set by the Federal Network Agency (BNetzA) when a system was commissioned. Since the EEG 2017, system operators above a certain system size have had to bid for the amount of the value to be applied to their system in an auction process.
- What is the service fee?
A direct marketer must estimate when a renewable energy plant will feed in how many megawatt hours and at what prices the electricity will be traded at the respective times. On the one hand, this results in income. These must be compared with the expenses: expected payments to the plant operator, outage work in the event of market-related curtailments, redispatch measures by the grid operator and internal marketing and distribution costs. The direct marketer uses these components to calculate his service fee.
- How is the market premium calculated?
The market premium is calculated using the following formula: The market premium corresponds to the fixed (EEG) feed-in tariff minus the market value or monthly market value.
For existing plants, the management premium of 0.2 cents per kilowatt hour for less volatile generation plants with biogas and hydropower and 0.4 cents per kWh for photovoltaics and wind are added.
- Where is the market value published?
The grid operators publish monthly market values and annual market values on the joint platform www.netztransparenz.de. The spot market price as well as the market value for solar and the market values for onshore and offshore wind can be viewed by everyone here.
- How does the payment flow work in the market premium model?
A plant supplies electricity. This is channelled via balancing groups at the transmission system operator and direct marketer and traded by the direct marketer on the exchange. The direct marketer transfers the proceeds, minus a service fee, to the operator. In addition, the grid operator pays the market premium including the priced-in management premium to the operator.
What are the risks of direct marketing?
- Price risk
The market premium was previously paid by the grid operator in order to offer system operators compensation for the legally guaranteed EEG remuneration. It is difficult to forecast how the market values will develop. They have to be reassessed every month. For the direct marketer, this harbours the so-called market value risk: he has to estimate how much income he can generate by marketing the plant - he has to compare this with the expenses and his internal costs. Based on this comparison, he calculates an individual service fee for each system.
- Volume risk
When building a wind turbine or photovoltaic system, a lot of data is analysed in order to be able to estimate the electricity production as accurately as possible. The actual electricity production is also forecast during operation based on weather forecasts. However, as sun and wind are never 100 per cent predictable, there are deviations in production. The direct marketer must compensate for surpluses or shortfalls on the electricity exchange at short notice.
- Profile risk
Profile risk is when the market values change compared to the estimate.
Requirements for the market premium and how to obtain it?
In order to set up a direct marketing contract and register installations for marketing, a service provider requires the following data:
Master data of the wind or photovoltaic park
Geo coordinates of the systems
Hub height and rotor diameter (for wind turbines)
Load profile data of the distribution grid operator in quarter hours
Outage work for redispatch measures
What subsidies are available in addition to the market premium?
In addition to the market premium, there are also conventional EEG subsidies, investment subsidies, grants for storage technologies, research and development subsidies and low-interest loans in the field of renewable energies. Subsidy programmes vary depending on the federal state and specific technology.
What are reference market value and reference market price?
In Germany, the term energy source-specific market value is used - in Austria, this value is called the reference market value. The term reference market price also originates from Austria.
Conclusion
In their infancy, renewable energies were subsidised by society via the EEG levy. They have now grown up and contribute to a functioning energy supply in Germany for the vast majority of hours. There are countless direct marketers of electricity in Germany and the direct marketing of solar and wind are established processes for the market-driven integration of renewable energies.
Since 2020 - 20 years after the introduction of the EEG - more and more plants have been phased out of support. Since then, direct marketing of electricity has played an increasingly important role: over 80 per cent of wind and solar power is directly marketed. The market premium model has made a significant contribution to the success of the energy transition.
