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 design and introduction of direct marketing of green electricity in 2012. Direct marketing is a subsidized form of marketing green electricity. Previously, operators of renewable energy plants had to supply the electricity they 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 have been able to sell electricity directly on the wholesale market. The market premium model ensures that direct marketing is just as financially reliable as conventional EEG subsidies. This means that renewables are becoming increasingly well 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 for a wind or solar power plant. The market premium compensates for the difference between the current market value and the plant-specific subsidy level. It therefore prevents financial losses compared to conventional EEG subsidies.
The market premium model ensures that solar or wind power plants can be operated profitably through direct electricity marketing. Operators should not suffer any financial disadvantages compared to EEG-subsidized plants. This form of direct marketing is called EEG direct marketing or direct marketing in the market premium model.
Plant operators either decide to do so voluntarily or are obliged to do so: since 2016, plants with a capacity of more than 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 market price on the exchange—without subsidies such as feed-in tariffs or market premiums. This so-called other direct marketing is particularly attractive for plants whose subsidies under the EEG expire 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 included in the market premium and paid by the grid operator.
What is the market value?
The market value of electricity reflects the average hourly prices on the EPEX Spot spot market. In addition, the spot prices are offset against energy source-specific factors. The market value thus reflects the value of the electricity fed into the grid depending on the technology used. For this reason, the specific market values are also referred to as the monthly market value for solar power, the market value for onshore wind power, and the market value for offshore wind power.
What is the applicable value?
The applicable value is also used to calculate the market premium. It represents the EEG subsidy rate for renewable energies. Initially, it was set by the Federal Network Agency (BNetzA) when a plant was commissioned. Since the EEG 2017, plant operators above a certain plant size must bid for the applicable value for their plant in an auction process.
What is the service fee?
A direct marketer must estimate how many megawatt hours a renewable energy plant will feed into the grid and at what prices the electricity will be traded at the respective times. This results in revenue on the one hand. This must be offset against expenses: expected payments to the plant operator, downtime due to market-related curtailments, redispatch measures by the grid operator, and internal marketing and sales costs. The direct marketer calculates its service fee based on these components.
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.
In addition, for existing plants, there is a management premium of 0.2 cents per kilowatt hour for low-volatility generation plants using biogas and hydropower, and 0.4 cents per kWh for photovoltaics and wind power.
Where is the market value published?
The grid operators publish monthly market values and annual market values on the joint platform www.netztransparenz.de. Here, anyone can view the spot market price, the market value for solar power, and the market values for onshore and offshore wind power.
How does the payment flow work in the market premium model?
A plant supplies electricity. This is routed via balancing groups to the transmission system operator and direct marketer and traded on the exchange by the direct marketer. The direct marketer transfers the proceeds minus a service fee to the operator. In addition, the grid operator pays the market premium, including the management premium, to the operator.
What are the risks involved in direct marketing?
Price risk
The market premium has been paid out by the grid operator to date in order to offer plant operators compensation for the EEG remuneration guaranteed by law. It is difficult to predict how market values will develop. They must be reevaluated every month. For direct marketers, this entails the so-called
Market value risk
He must estimate how much revenue he can generate from marketing the facility—he must then compare this with his expenses and internal costs. Based on this comparison, he calculates an individual service fee for each facility.
Quantity risk
When constructing a wind turbine or photovoltaic system, a lot of data is evaluated in order to estimate electricity production as accurately as possible. Similarly, actual electricity production is forecast during operation based on weather forecasts. However, since sun and wind are never 100 percent predictable, deviations in production occur. The direct marketer must compensate for excess or shortfall quantities at short notice on the electricity exchange.
Profile risk
Profile risk refers to a situation where market values change in comparison to estimates.
Requirements for the market premium and how to obtain it?
In order to draw up a direct marketing contract and register plants for marketing, a service provider requires the following data:
- Master data of the wind or photovoltaic park
- Geo-coordinates of the plants
- Hub height and rotor diameter (for wind turbines)
- Load profile data from the distribution network operator in quarter-hourly intervals
- Outage power during redispatch measures
What subsidies are available in addition to the market premium?
In addition to the market premium, other forms of support for renewable energies include traditional EEG subsidies, investment subsidies, grants for storage technologies, research and development subsidies, and low-interest loans. Support programs 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, while in Austria this value is referred to as the "reference market value." The term "reference market price" also originates from Austria.
Conclusion
In their early days, renewable energies were subsidized by society through the EEG surcharge. They have now come of age and contribute to a functioning energy supply in Germany for the majority of the time. There are countless direct electricity marketers in Germany, and direct marketing of solar and wind energy are established processes for the market-oriented integration of renewable energies.
Since 2020—20 years after the introduction of the EEG—more and more plants have been phasing out subsidies. Since then, direct marketing of electricity has played an increasingly important role: over 80 percent of wind and solar power is now directly marketed. The market premium model has contributed significantly to the success of the energy transition.
